Understanding the Differences Between a Consumer Proposal and Bankruptcy
Canadian households are more in debt than ever before. With the household debt-to-income ratio reaching 164.0 per cent in the fourth quarter of 2013, it should come as no surprise consumer proposals and bankruptcies are on the rise. A total of 118,678 Canadians filed for personal bankruptcy or filed a consumer proposal in 2013, according to the federal Office of the Superintendent of Bankruptcy. While personal bankruptcy rates dropped by 3.2 per cent, consumer proposals were up by 5.4 per cent.
If you’re up to your ears in debt, you may be wondering about the best way to help tackle your debt problem. Two options to consider as a last resort are filing a consumer proposal or filing for personal bankruptcy. A consumer proposal is when you make an offer to your creditors to modify your debt obligations. For example, you propose paying a lower amount of debt each month. Personal bankruptcy is a legal process in which you may be discharged of most of your debts, subject to reasonable conditions.
Although both share similarities by helping you resolve your debt situation, there are key differences to be aware of.
Eligibility: The requirement for filing a consumer proposal is a lot stricter. To qualify for a consumer proposal, your total debt cannot exceed $250,000 (excluding your mortgage on your principal residence). You must also prove you have the ability to repay your debt under the proposal. Filing for bankruptcy is a lot more flexible; if you owe more than $1,000 in debt, you can file for personal bankruptcy.
Cost: Consumer proposals provide a lot more certainty for budgeting purposes. Once you’ve come to an agreement with your creditors and your proposal has been accepted, your debt payment is deducted each month. Your monthly payment will remain the same for the duration of your proposal. With personal bankruptcy, if your income goes up, so does your garnishment. For example, if you receive a raise at work or land a higher-paying job, the amount you’ll be required to repay will increase.
Assets: The biggest advantage a consumer proposal has over bankruptcy is that your personal assets are safe and sound. When you file a consumer proposal, as long as it’s accepted you will not lose any assets. When you file for bankruptcy, you are putting the personal assets you’ve worked so hard to earn on the line. Everything from your house to your RRSPs is fair game for creditors.
Credit Rating: Here’s another important difference between the two. If you ever want to purchase a house or a car with the assistance of a lender, keeping your credit rating in good shape is very important. When you file a consumer proposal, you will receive an R7 credit rating – this means you’ve made a debt agreement with your creditors. While this isn’t a good rating, it’s a lot better than filing for bankruptcy, which results in an R9 rating. This is the worst rating possible and will stay on your credit report anywhere from seven to 14 years. This can make it very difficult to rebuild your credit rating.
Reporting Requirements: With a consumer proposal you’re given more freedom; you’re under no obligation to submit a monthly report. When you file for bankruptcy, you’re kept on a tighter leash – you must complete a budget on a monthly basis and submit pay stubs to your trustee.
If you’re in debt, you should do everything possible to get your personal debt situation under control. This can be accomplished in a number of ways, including increasing your income, cutting your expenses, and creating a budget and monitoring it. It’s highly advisable you consult with a debt counselor to see whether a consumer proposal or personal bankruptcy is right for you.
The Office of the Superintendent of Bankruptcy Canada has a wealth of resources for those with debt issues. For more information, please visit: http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/h_br01854.html