Why would someone go consumer proposal and not bankruptcy?

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Choosing a consumer proposal over bankruptcy can be wise for keeping assets like home equity and tax refunds while managing debt. You pay a portion of your unsecured debts over up to five years, benefiting from a steadier credit score hit. It’s a tidy way to handle debts, including those with the CRA.

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Question

Why would someone go consumer proposal and not bankruptcy? I want to understand why someone might choose a consumer proposal over filing for bankruptcy. What are the key differences?

From: Anonymous Question, Calgary, Alberta (AB)

Debt Insiders Answer

Folks often pick a consumer proposal instead of bankruptcy because it helps them hang onto their stuff, like home equity and tax refunds, while sorting out those nagging debts. With a consumer proposal, you backtrack just a portion of your unsecured debts over a set period, which can be up to five years. This option is great for those with a steady income ready for regular payments, offering a bit of financial stability without tossing away major assets that a bankruptcy might claw away.

Plus, it gives a lighter hit to your credit score, leaving an R7 rating on record for a shorter spell than the harsh mark from a bankruptcy, which lingers for six years if it’s your first time. And on top of that, consumer proposals roll all those unsecured debts, including any you might owe to the tax guys at the Canada Revenue Agency, into one neat monthly payment. It simplifies how you handle your finances, unlike the variable payments tied to bankruptcy, which depend on your surplus income. For many people, it feels like grabbing the reins of their financial future without the long shadow that a bankruptcy filing casts.

From: Insider Adam

Office of the Superintendent of Bankruptcy (OSB) Answer

Individuals may choose a consumer proposal over bankruptcy for several reasons related to personal financial circumstances and goals.

1. Debt Repayment: A consumer proposal allows the debtor to negotiate a repayment plan with creditors for a portion of the debt, typically over a period of 3 to 5 years (Bankruptcy and Insolvency Act, RSC 1985, c. B-3, Section 50.6). In contrast, bankruptcy usually results in the liquidation of assets and a discharge of debts, which can be more detrimental to the debtor’s financial standing.

2. Asset Retention: With a consumer proposal, individuals can retain their assets, as long as they can continue making agreed payments (Bankruptcy and Insolvency Act, RSC 1985, c. B-3, Section 66.31). Bankruptcy may require the sale of non-exempt assets to repay creditors.

3. Impact on Credit Rating: While both options affect credit rating, a consumer proposal may not have as severe an impact as bankruptcy and stays on the credit report for a shorter duration (Creditors’ Rights, C.R.C., c. 369, Section 14). Bankruptcy can remain on a credit report for up to 7 years or longer.

4. Eligibility: Not all debts can be discharged through bankruptcy which may leave major debts unpaid. A consumer proposal may be more appealing as it provides an opportunity to address specific debts rather than facing a total discharge (Bankruptcy and Insolvency Act, RSC 1985, c. B-3, Section 49).

5. Overall Control: A consumer proposal lets individuals remain actively involved in managing their finances, allowing them to propose attractive terms to creditors, which can sometimes be less intimidating than filing bankruptcy.

These key differences highlight why someone might prefer a consumer proposal as a way to address overwhelming debt while maintaining more control over their financial future.

From: OSB Helper

Related Questions

Here are the top 5 most frequently asked questions related to why someone might choose a consumer proposal over bankruptcy, based on common concerns and trends in the context of Canadian debt and insolvency:

1. What are the differences between a consumer proposal and bankruptcy?

A consumer proposal allows you to keep more of your assets, has less of an effect on your credit score, and typically involves fixed monthly payments, whereas bankruptcy involves surrendering assets and can have a more significant impact on your credit score[1][3][5].

2. How does a consumer proposal affect my credit score compared to bankruptcy?

A consumer proposal stays on your credit record for 3 years, whereas a first-time bankruptcy stays on your record for 6 years[1][3][5].

3. Can I keep my assets if I file a consumer proposal or go bankrupt?

In a consumer proposal, you can retain most of your assets, including your home and car, whereas in bankruptcy, you surrender your assets to the trustee, although certain exemptions apply[1][4][5].

4. What are the monthly payment obligations for a consumer proposal versus bankruptcy?

In a consumer proposal, the monthly payments are fixed and based on a negotiated settlement, while in bankruptcy, monthly payments can vary based on your income and may include surplus income payments[1][3][5].

5. How long does it take to complete a consumer proposal compared to bankruptcy?

A consumer proposal typically takes up to 5 years to complete, while bankruptcy usually takes 9 to 21 months to be resolved[1][3][5].

If you have a question about debt see our debt questions or ask your own debt related question.

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