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What are the differences between a Bankruptcy and Consumer Proposal?

Bankruptcy and Consumer Proposals are the two most common options for individuals who are facing financial difficulties and find themselves unable to pay their debts.  Both options are only available through a Licensed Insolvency Trustee.

Bankruptcy is a legal option that is legislated by the Bankruptcy and Insolvency Act.  In simple terms, you assign and abandon your assets and in turn, you receive a discharge of your unsecured debts. Not all assets are taken; there are exemptions available in every province that protects your basic assets.

A Consumer Proposal is an alternative to bankruptcy that is also legislated by the Bankruptcy and Insolvency Act. This option allows you to offer a settlement to your creditors without any risk to your assets. If the majority of your creditors by dollar value accept your offer, it is legally binding on all unsecured creditors. A typical example of a consumer proposal is a settlement for about 30% of the person’s debts, but each proposal is dependent on the individual’s own financial circumstances.

Who Qualifies to File?

An insolvent person, someone who owes at least $1,000 and is unable to meet their payment obligations as they generally fall due and does not have assets sufficient to pay their debts, qualifies to file for bankruptcy.

For a consumer proposal, the debts must not exceed $250,000 (excluding a mortgage on your principal residence) to qualify to file.

How Much Does It Cost?

In both options, the Trustee is paid according to a tariff as set out in the Bankruptcy and Insolvency Act.

Bankruptcy:  Payments required to be paid in bankruptcy vary from case to case as they are based on your income. The more a person earns, the more they have to pay (surplus income). A basic bankruptcy where the person has no surplus income is $1,800. This is normally paid by way of monthly installments of $200 per month for nine months.  There are exceptions of course. Talking to a Licensed Insolvency Trustee about your own situation will help to clarify what will need to be paid and over what period of time.

Consumer Proposal: The Trustee, or in this case we are referred to as an Administrator of the Consumer Proposal, receives a tariff based on the funds being paid in to settle the debt.  Usually, the debtor has one fixed monthly payment that will cover the costs of the administration and the payments to the creditors.

Credit Rating Differences

Bankruptcy:   The credit rating falls to an R9 which is the worst rating you can have. The rating stays on for the time you are in bankruptcy plus an additional 6 years in the case of a first time bankrupt and 14 years in the case of a second (or more) time bankrupt.

Consumer Proposal: The credit rating falls to an R7 which is moderately better than bankruptcy. The rating stays on for the duration of the settlement term plus an additional three years. For example, if someone’s proposal term is 60 months or 5 years, it would be on their record for a total of 8 years. If you can pay your proposal in full sooner, it would come off your credit record sooner.

It is possible to rebuild your credit rating in both options so don’t be intimidated by these numbers.

Reporting Obligations and Duties

Bankruptcy: You will be required to file a monthly report of your income and expenses each month, providing proof of your earnings, for example, a copy of your paystub. This allows the Trustee to calculate whether you have surplus income that is payable. You will also be required to make your monthly surplus income payments and attend two credit counselling sessions. The Trustee is also required to file your tax return for the year you file your bankruptcy; you will be required to provide your tax information.

Consumer Proposal:  You have two obligations, make the payment as agreed between you and your creditors, and attend two credit counselling sessions.

In both options, you need to report if there are any material changes to your situation, for example, if you lose your job and are unable to make your payments.

Tax Refunds and GST Credits

Tax refunds and GST credits are collected by the Trustee only in bankruptcy. In some cases, GST credits are refunded back to the bankrupt. No tax refunds or GST credits are collected in Consumer Proposals.

Speaking to a Licensed Insolvency Trustee to find out your best option based on your own unique set of circumstances. Talking to a Licensed Insolvency Trustee at D. Thode & Associates Inc. is your first step. Licensed Insolvency Trustee’s are the only professionals who can assist with your bankruptcy or consumer proposal filing.

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