Consumer Proposal vs Bankruptcy (MNP 3 Minute Debt Break)

Today, many Canadian households are struggling to keep up financially. To compensate, many have relied on credit to carry them through financial difficulties. While credit can be a valuable tool, credit reliance can quickly lead to a dangerous cycle of debt and stacking interest.

If debt has taken hold, it's first important to understand that you're not alone and you have options. For eliminating debt all-together, two widely used options for Canadian households are Bankruptcy and Consumer Proposals.

There are several differences between a Consumer Proposal and a Bankruptcy. Although both filings are legislated under the Bankruptcy and Insolvency Act, also known as the BIA, and must be filed by a Licensed Insolvency Trustee, these are two separate processes. 

A Consumer Proposal is an arrangement made with your creditors which, in most cases, allows you to retain all of your available assets.  Debtors who would like to retain their available assets, like a non-exempt vehicle or non-exempt equity in their home, may arrange with their Trustee to pay their creditors an equivalent amount over a specified timeframe, instead of filing for bankruptcy. In the case of a bankruptcy, certain available assets may be lost.

Filing a Consumer Proposal is a different process from that of a bankruptcy. Generally, a Consumer Proposal will not require a court appearance. Creditors have 45 days to vote on the Consumer Proposal and have the option to accept, refuse or request a meeting of creditors. It is possible to amend the initial Consumer Proposal filing if the creditors do not agree with the terms.

Once your creditors accept the Consumer Proposal, your only other requirements are to attend two counselling sessions. Provided you continue meeting the terms of the Consumer Proposal, the Administrator, or the Licensed Insolvency Trustee, will not monitor your income, expenses or any disposition of assets. 

In a bankruptcy, a Trustee will monitor the bankrupt's income throughout the process and must file certain income tax returns on the bankrupt's behalf. Trustees may also be required to seize any after acquired assets in a bankruptcy scenario.

One of the most significant differences between a Consumer Proposal and a bankruptcy is the impact it can have on your credit rating. Bankruptcy will remain for six years after you receive your certificate of discharge. A Consumer Proposal, on the other hand, will stay on your credit bureau for three years after receiving your Certificate of Full Performance. 

Many individuals may wish to avoid bankruptcy for several reasons — which could include stigma, legal implications, business ramifications or disclosure requirements in retaining professional designations. 

When you're struggling from one payment to the next, understanding which route to choose can be daunting. During a Free Confidential Consultation, a Licensed Insolvency Trustee can help you understand your options. That way you can make a fully informed decision as you work towards a stronger, debt-free future.

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