What are the alternatives to Bankruptcy, and which is best for me?

If you are experiencing overwhelming debt loads, severely reduced income, unexpected job loss, or depleted savings, you may be wondering if Bankruptcy is right for you. However, there are other ways to eliminate debt and get a financial fresh start.

Why would I want to avoid Bankruptcy?

Before comparing the debt solutions available, it’s a good idea to consider the advantages and disadvantages of Bankruptcy. Although it immediately stops collection action, creditors cannot refuse a Bankruptcy, and you will be debt-free when discharged, there are drawbacks.

The disadvantages of Bankruptcy include:

• You must surrender any non-exempt assets for the benefit of your creditors (or pay the equity value required to keep them)
• You must report monthly income and expenses
• You may have to make surplus payments if your income increases or is higher than prescribed, which would also increase the length of your Bankruptcy
• Your credit rating will be negatively affected for seven years if it’s your first Bankruptcy, as it is reported as an R9 (the worst rating) on your credit report.
• A court hearing may be required if creditors oppose your discharge from Bankruptcy
• Some tax refunds will be turned over to the trustee

You may have alternative options to help you avoid these disadvantages.

What are my options?

The main alternatives to Bankruptcy are debt management programs and the Consumer Proposal. Like Bankruptcy, a Consumer Proposal is an option available under the Bankruptcy and Insolvency Act (BIA) and can only be administered by a Licensed Insolvency Trustee (LIT). It is a direct, legally binding alternative to Bankruptcy; a debt management program is not.

Let’s explore these alternatives and identify how they may best suit your situation.

Debt management program

A debt management program or plan (DMP) is a debt relief option designed to help you pay off your outstanding debt. It’s typically administered by a credit counselling service and involves an arrangement whereby your payments, such as credit card balances, are consolidated into one monthly amount you pay your credit counsellor.

The credit counsellor negotiates with your creditors on your behalf to encourage their participation. A debt management program cannot reduce the principle of your debt. Still, a credit counsellor can request the elimination or reduction of interest charges and the discontinuance of collection proceedings for as long as you make your payments in full and on time.

Although this method typically offers the assistance of a debt professional to create a simpler budget and potentially reduce the interest you owe, it also has drawbacks. Firstly, your creditors are not bound by the arrangement and may choose to reinstate the original payment schedule at any time, including collections proceedings.

Most DMPs are repaid over four or five years. Your credit status will suffer because the DMP is registered on your credit report as R7 for up to six years. It’s important to note that Canada Revenue Agency (CRA) debts are not eligible and will continue at their current value and interest rate. Finally, the debt management plan has fees, typically including a set-up fee and monthly administration fees.

Consumer Proposal

The Consumer Proposal is a proceeding under the BIA. It, therefore, involves a Licensed Insolvency Trustee who negotiates with your creditors to consolidate your debts into one monthly payment for up to five years. Unlike the DMP, a Consumer Proposal is legally binding and immediately stops collections, interest, and wage garnishments for as long as you meet your payment requirements.

A Consumer Proposal can substantially reduce your principal debt; it also eliminates interest payments throughout the duration of the proposal. Moreover, a Consumer Proposal allows you to maintain some control over your assets. Unlike a DMP, it covers CRA and other government debts and involves no up-front costs.

You will also attend two credit counselling sessions to learn debt-avoiding financial strategies and how to rebuild your credit rating.

The most significant challenge of a Consumer Proposal is that the majority of creditors, by dollar value, must vote to accept your proposal. If they do not, then Bankruptcy may be the only remaining option. Your proposal will also be annulled if you fall three payments behind. The Consumer Proposal registers as an R7 on your credit report for up to six years.

How do I know if a Consumer Proposal is right for me?

A Consumer Proposal is a less severe debt forgiveness program than Bankruptcy. One of the requirements for a Consumer Proposal is that you have less than $250,000 in debt, excluding any mortgages on your principal residence.

A Consumer Proposal may be a good option if you are agreeable to the duration, which is typically longer than a Bankruptcy. Payments are affordable and flexible and will not vary based on your income. A Consumer Proposal will also allow you to keep your assets, including real estate, vehicles, and investments.

Consumer Proposal vs. Bankruptcy: What is the difference, and when is Bankruptcy my best option?

Many people prefer the idea of a Consumer Proposal over a Bankruptcy because the credit impact is less severe and is reported for a shorter period of time. Also, the ability to keep assets and make a lower payment over a longer time is less disruptive to their standard of living. However, in some circumstances, Bankruptcy may be the best or only option.

Bankruptcy may be preferable to Consumer Proposal in situations where you cannot pay even a portion of your debts. Although you must surrender some or all your assets, you will not have to make further payments to your creditors. It’s worth noting that each province sets limits around the assets a bankrupt person can keep up to a certain value.

The Bankruptcy process usually takes between nine months and three years, depending on several factors, which is typically a shorter timeframe than the Consumer Proposal.

Only a Licenced Insolvency Trustee can file a Bankruptcy or a Consumer Proposal on your behalf, so it is important that you speak to a trustee to get the help you need to figure out the best option for your situation.

Defeating your debt starts with understanding your options

Are you struggling with unmanageable debt and collection agencies and questioning whether you are solvent? MNP offers Free Confidential Consultations to help you understand your options for a financial fresh start.

If, after learning your options, you decide to move forward with a Consumer Proposal or Bankruptcy, our Licensed Insolvency Trustees will support you through the process. Alternatively, if you choose a DMP as your best option, we will happily refer you to a reputable local credit counsellor.

For an immediate comparison of how each option would work on your current debts, we also recommend checking our Debt Calculator tool.