Consumer Proposal vs. Bankruptcy: What's the Difference?

_{By Bromwich+Smith Staff | 1573 words | Reading Time: 8 minutes | Last update 2023/05/11}

A bankruptcy and a consumer proposal can be excellent options for you if you are experiencing financial difficulties. A consumer proposal is a great choice for you, if you have the ability to pay something to your creditors but need to change payment arrangements and have equity in assets you want to keep. While bankruptcy is for people that are overwhelmed by their debt, and don’t have a steady income, making it difficult to afford payments owed to creditors. 

When used appropriately, both bankruptcy and a consumer proposal can be an effective form of debt relief. However, both can have significant impacts on your life. We are going to outline the major differences between the two, which includes: the costs of both options, their effects on your assets, the time each process takes, their impact on your credit, the long-term consequences, in order to assist you in figuring out which option is best for you.

The Differences Between Consumer Proposals & Bankruptcy

Both bankruptcy and consumer proposals are governed by the Bankruptcy and Insolvency Act, directives issued to bankruptcy trustees by the Superintendent of Bankruptcy, and provincial laws. They’re intended to provide protection from the courts for people who are unable to repay their debts in full.

Bankruptcy was originally designed to provide people who had fallen on hard times and financial distress a fresh start, especially from debts that they did not have the capability of repaying. 

How bankruptcy works is that if someone files for bankruptcy, all collection activity on the debts included in the bankruptcy are stopped and creditors are typically forced to accept less for the debts owed to them than the borrower originally agreed to repay.

A consumer proposal is different from bankruptcy in that your bankruptcy trustee must offer your creditors an amount of money to settle your debts and your creditors will vote on the offer. If the creditors who own the majority of your debt accept it, you repay the agreed on amount over a set length of time (usually this is just under 5 years).

Here are some other key differences between a consumer proposals vs. bankruptcy: 

• Assets you get to keep: In both bankruptcy and a consumer proposal, you normally get to keep the assets that are most important to you. However, if you have equity in assets that you want to keep, you have to pay that equity to your trustee for the benefit of the creditors. An advantage of the consumer proposal is that you can spread the payments of the equity over a term of up to 5 years. In a bankruptcy, you are required to repay the equity over the term of your bankruptcy. Which is shorter than in a consumer proposal, so your payments will be higher. 
• How much you pay back: A Licensed Insolvency Trustee (LIT) will work with you to determine the amount you are required to pay under each option. With a consumer proposal you will pay the same amount to your LIT every month for the term of the proposal. Whereas with bankruptcy the amount you pay could vary depending on your income and whether you have been bankrupt previously. 
• How long they last: With a consumer proposal you are in it for the length of time you and your creditors agree, up to 5 years. Another great advantage of a consumer proposal is that you can pay it off earlier than the negotiated term, without any extra costs or penalties. Bankruptcy has a predefined length of time, set out in the legislation which can range from 9 to 36 months. This is determined by factors such as your income levels, whether you have been bankrupt before and if you have completed everything required of you through the process. 
• The filing process: To have a successful consumer proposal, your creditors must vote in favour of the proposal filed through the process conducted by your LIT. If the majority of creditors (based on dollar amounts owed) vote in favour of your proposal, your proposal is deemed approved. If you are insolvent, you have the right to file a bankruptcy and your creditors cannot stop you. However, they could object to you completing your bankruptcy if they believe you were dishonest or obtained or used your credit improperly. 
• The impact on your credit rating: For most credit reporting agencies, a consumer proposal stays on your credit rating for 3 years after you complete your proposal whereas a bankruptcy stays on your credit rating for 6 years after you are discharged from the process. 

In terms of your debts most unsecured debts are settled (or discharged) in a consumer proposal and bankruptcy. However, some debts survive and you are still required to pay them, such as the following:

• Child and/or spousal support payments.
• Fines, penalties and restitution orders imposed by a court.
• Any award by the court for intential bodily harm, sexual assault or wrongful death.
• Any debt or liability arising from fraud, embezzlement, misappropriation or misconduct. 
• Any debt or liability for obtaining property by false pretense or fraudulent misrepresentation.
• Liability for any dividend a creditor would have been entitled to receive when you fail to disclose the creditor to your trustee. 
• Student loans in certain circumstances. 

This probably feels like a lot of information to absorb, so we hope outlining the differences between a consumer proposal vs. bankruptcy empowers you to make a go forward plan to conquer your debt. 

Keep in mind, only a Licensed Insolvency Trustee like Bromwich+Smith has the legal authority to administer a Consumer Proposal or a Bankruptcy for you. In fact, if an online or offline debt relief service offers a Consumer Proposal or Bankruptcy ask if they are Licensed Insolvency Trustees. If they are not, they will be required by law to engage an external Trustee, which could add their unnecessary fees to the process. 

Remember, we’re here to help you find the solution that best fits your needs. At Bromwich+Smith, we do this by offering an initial free, no obligation, confidential consultation by phone 1.855.884.9243 , live chat,or video. You can also request a call back at our contact us page. We’re working with you to rebuild your worth.

FAQ Related to  Consumer Proposal vs. Bankruptcy: 

1- How will bankruptcy or consumer proposal affect my credit rating? 
 
Filing for bankruptcy or a consumer proposal will have a negative impact on your credit rating. Both options will remain on your credit report for several years, typically six to seven years for a first-time bankruptcy and three years for a consumer proposal after it is completed. During this time, it may be difficult to obtain new credit, and if you do, it may come with higher interest rates and less favorable terms. 

2- Can I keep my assets in both bankruptcy and consumer proposal? 

 
In a bankruptcy, some assets may be exempt, depending on your province or territory's laws. These exemptions typically include basic necessities such as clothing, household furnishings, and a primary vehicle. However, non-exempt assets may be sold to pay back your creditors. 
 
In a consumer proposal, you can keep all your assets, but you will be required to make payments to your creditors over a set period of time up to five years. 
 
3- Can I get a mortgage after filing for bankruptcy or consumer proposal? 
 
It is possible to get a mortgage after filing for bankruptcy or a consumer proposal, but it may be more difficult and come with higher interest rates and stricter terms. It may take time to rebuild your credit after filing, and lenders will want to see that you have a steady income and a good payment history. 
 
4- Can I get credit after filing for bankruptcy or consumer proposal? 
 
It is possible to get credit after filing for bankruptcy or a consumer proposal, but it may be more difficult and come with higher interest rates and less favorable terms. It may take time to rebuild your credit, and it's important to use credit responsibly and make all payments on time. 
 
5- How long does it take to file for bankruptcy or consumer proposal? 
 
The length of time it takes to file for bankruptcy or a consumer proposal depends on individual circumstances. In a bankruptcy, you must complete credit counselling and provide documentation of your debts, assets, and income. The entire process typically takes nine to 21 months. 
 
In a consumer proposal, you must work with a licensed insolvency trustee to negotiate a payment plan with your creditors. The process typically takes three to five years to complete. 
 
6- How do I know if Consumer Proposal or Bankruptcy is right for me? 
 
The decision to file for bankruptcy or a consumer proposal depends on individual circumstances, such as the amount of debt you owe, your income, and your assets. It's important to seek professional advice from a licensed insolvency trustee who can assess your situation and provide guidance on the best course of action. 
 
7- What are the costs associated with filing for bankruptcy or consumer proposal? 
 
There are costs associated with filing for bankruptcy or a consumer proposal, including administrative fees and fees for the licensed insolvency trustee's services. These fees vary depending on the complexity of your case and the amount of debt you owe. Speak to a licensed insolvency trustee for an accurate price.  
 
8- Can I pay off a Consumer Proposal or Bankruptcy early? 
 
In a consumer proposal, you can pay off the remaining balance early if you have the funds to do so. In a bankruptcy, you may be able to make a proposal to your creditors to pay off your debts early, but it must be approved by the court. 

Related source:

Consumer Proposal: Alternative to Bankruptcy| Bromwich+Smith (bromwichandsmith.com)