If you are dealing with a lot of debt and you can’t seem to get on top of it despite your best efforts, what should you do?
You may have heard terms like bankruptcy and consumer proposal as possible strategies to get out of debt, but are you aware of the implications of choosing one over the other? Let’s take a closer look at bankruptcy vs consumer proposal.
“Bankruptcy is sometimes viewed as an opportunity to start over with a “clean slate”, but it isn’t as simple as that. 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,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
To declare bankruptcy, you basically surrender all of your assets to a Licensed Insolvency Trustee in exchange for getting rid of your debt. These assets are liquidated to pay off as much of your debt as possible. In some cases, you are allowed to keep some of your assets (for instance they usually aren’t allowed to take Locked in Pensions or RRSPs) to assist with the cost of living, but that is on a case-by-case and can vary from province to province.
It’s important to know that not all debts can be included in a bankruptcy; secured debts aren’t included; car loans, mortgages, student debts (with some conditions) and things like alimony and child support cannot be included in the sum.
It takes anywhere from 9 to 21 months for your first bankruptcy to be completed and have your debts discharged. There are costs involved; you will be required to pay fees to the Licensed Insolvency Trustee; you are also required to pay creditors a portion of your surplus income (which is determined based 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.
As opposed to bankruptcy, where your debts are eliminated by creditors, in a consumer proposal you agree to pay back a portion of your debts and creditors agree to forgive the remainder of the debts. This is facilitated by a Licensed Insolvency Trustee and is tailored based on your income. It is amortized over a period that suits your budget (usually 48 to 60 months). Interest stops accruing on your debts; debt collectors are no longer allowed to contact you and if your wages had been garnished previously, this 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 are in bankruptcy, so that is another compelling reason to select a consumer proposal as your debt repayment option if it works.
There is no cost involved in 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. That’s why you need to understand your options fully and how your decisions today will impact your financial health in the future,” says Schwartz.
Are you running out of ways to pay your debt? We can help you weigh your options. Call us at or start with our online debt analysis.