If you’re dealing with a lot of debt and you can’t seem to get ahead of it despite your best efforts, there are solutions. You may have heard terms like bankruptcy and consumer proposal as possible strategies to get out of debt, and you should be aware of the implications of one over the other. Let’s take a closer look at whether you should choose bankruptcy or consumer proposal.
“Bankruptcy is sometimes seen as an opportunity to start over with a clean slate, but it isn’t as simple as that,” says Jeff Schwartz, executive director of Consolidate Credit Counseling Services of Canada. “It’s a drastic financial move that will impact your finances for years into the future. Because of this, bankruptcy really should only be an option of last resort.”
To declare bankruptcy, you surrender all your assets to a Licensed Insolvency Trustee (LIT) in exchange for getting rid of your debt. A LIT is a professional who adheres to the Canadian Government’s finance laws. This person provides services for people with debt issues. They can help to make you assets liquid to pay off as much of your debt as possible. In some cases, you can keep some of your assets: they usually aren’t allowed to take Locked in Pensions or Registered Retirement Savings Plans (RRSPs) to assist with the cost of living, but that is on a case-by-case basis and can vary from province to province.
It’s important to know that not all debts can be included in a bankruptcy, including secured debts, car loans, mortgages, or student debts (with some conditions). Also, things like alimony and child support cannot be included in the sum.
It takes anywhere from nine to 21 months for your first bankruptcy to complete and discharge your debts. But don’t forget the costs. You must pay fees to the Licensed Insolvency Trustee, and you must also pay creditors a portion of your surplus income, depending on how much money you make and the size of your family.
Bankruptcy damages your credit deeply and can prevent you from qualifying for future credit for a long time. For a first bankruptcy, it will remain on your credit report for six years from your date of discharge; for a second bankruptcy, you can expect that record to be there for up to 14 years. As bankruptcy is a legal record, it can even impact your employment.
Choosing a Consumer Proposal
As opposed to bankruptcy, where creditors help eliminate your debts, in a consumer proposal you agree to pay back a portion of your debts and creditors agree to forgive the remainder of the debt. A Licensed Insolvency Trustee facilitates a consumer proposal, and uses your income as the basis for payments. It is amortized over a period that suits your budget (usually 48 to 60 months). Interest stops accruing on your debts during a consumer proposal; debt collectors may no longer contact you, and wage garnishment stops as well.
One of the benefits of selecting a consumer proposal over declaring bankruptcy is that it is less damaging to your credit rating. With a consumer proposal, you can have an R7 rating, vs. the more serious (and long-lasting) R9 rating that comes with bankruptcy.
Your assets don’t get seized in a consumer proposal, as they would in bankruptcy, so that is another compelling reason to select a consumer proposal as your debt repayment option, if possible. Also, there are no costs for doing a consumer proposal, in contrast to bankruptcy, where you need to pay fees.
“There is no one size fits all when it comes to managing your debts,” says Schwartz. “That’s why you need to understand your options fully, and how your decisions today will impact your financial health in the future.”
Are you running out of ways to pay your debt? Still can’t decide whether to choose bankruptcy or consumer proposal? We can help you weigh your options. Call us at 1-888-294-3130 or start with our online debt analysis.