Consumer Proposal Vs Bankruptcy: How Does It Affect My Credit Score
The Office of the Superintendent of Bankruptcy reports all consumer proposal and bankruptcy filings to the different credit reporting agencies in Canada. A consumer proposal will be reflected on your credit report for three years after the completion of your consumer proposal.
While the consumer proposal is reported on your credit report, it does not necessarily prevent you from obtaining new credit before the consumer proposal is purged from your credit report. Each new creditor will determine its lending policies for people in a proposal, but generally it is difficult and more costly to obtain credit before the proposal itself has been completed.
Two financial counselling sessions are provided during the consumer proposal process to provide you with tools and resources to help you reestablish your following the filing of a consumer proposal.
When you file a consumer proposal, you will receive an R7 rating on your credit report. An R7 rating indicates that you are making payments on your debts. According to Canada.ca, your consumer proposal filing will be on your credit report for a minimum of three years after you complete your proposal bankruptcies will remain on your credit report as an R9 for 6-7 years depending on your province and the credit reporting agency.
Main Differences Between Consumer Proposal Vs Bankruptcy
There are several important differences between a consumer proposal vs bankruptcy. Understanding these differences is critical in making an informed decision about which option is best for you. The most significant difference is that filing a consumer proposal will have far less of an impact on your than filing for bankruptcy.
Heres a look at the main differences between consumer proposals vs bankruptcy.
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Bankruptcy Is A Faster Process
If your goal is to quickly rid yourself of unmanageable debt, the bankruptcy process can be much faster than a consumer proposal. Once you have filed bankruptcy, you receive the protection of the automatic stay. This prevents your creditors from harassing you about making monthly payments on your debts.
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Differences Between A Consumer Proposal Vs Bankruptcy
If youre in a financial bind and looking for solutions, you may have run across the term consumer proposal. While it is a valid alternative to bankruptcy, it is not always the ideal solution for every consumer looking to avoid bankruptcy. In fact, many consumers will benefit much more from filing bankruptcy than they will from a consumer proposal. In this blog, the Kentucky bankruptcy lawyers at OBryan Law Offices explain the key differences of a consumer proposal vs bankruptcy, as well as which option may work best for you. To schedule a free consultation with us, please call our office at today.
What Are The Differences In Obligations
- Bankruptcy requires monthly reports of personal finances. This includes pay stubs from their employer and all monthly expenses. A trustee will review this information on a monthly basis to determine if surplus payments should be made.
- Agreed upon payments for consumer proposals are fixed, so there is no need for monthly reports.
You Do Not Need To Repay A Portion Of Your Debts
If you cant afford to repay any of your debts, bankruptcy is the better option. While you wont need to make any further payments to your creditors, you may need to surrender some of your assets to help repay your creditors. However, with a consumer proposal, you will be expected to repay some of your debts over a period of three to five years.
Consumer Proposal Vs Bankruptcy: Monthly Obligations
- Any person who declares bankruptcy must submit monthly financial reports. These reports must include a breakdown of personal expenses and pay stubs from their employer. These numbers are evaluated by a trustee who determines if that individual should be making additional surplus payments.
- Monthly financial reports are not required for consumer proposals.
All persons who file for bankruptcy or a consumer proposal are required by law to attend two credit counselling sessions.
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The Process Of Filing A Consumer Proposal Vs Bankruptcy
A bankruptcy or consumer proposal requires a Licensed Insolvency Trustee to file and administer the process.
Do you need a lawyer to file bankruptcy?
If creditors are likely to dispute debts or you need to protect assets like a home or vehicle, a lawyer will better represent your interests.
Who do you contact for help filing a consumer proposal?
The first step to filing a consumer proposal is to contact a Licensed Insolvency Trustee for a consultation about your financial situation. Not only is it required that an LIT evaluate your qualifications and prepare your consumer proposal filing, but the LIT can help guide you towards other options if a debt settlement is not the best route to take. You can also get a free consultation with a LIT so speaking to an LIT is your best option for getting help.
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More About Consumer Proposals
What Are The Differences Between A Consumer Proposal And Personal Bankruptcy
Need Help Reviewing Your Financial Situation?Contact a Licensed Trustee for a Free Debt Relief Evaluation
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How Bad Is An R7 Credit Rating
An R7 rating means that you have done a consumer proposal, a credit counselling program or you are making payments through an agreed arrangement to pay off your debt. … An R9 means that you have declared bankruptcy or your debt has been put into collection. This is the worst score on your credit rating.
Understanding The Discharge From Bankruptcy
A bankruptcy discharge is the final step in a bankruptcy. Once you are discharged from bankruptcy, you will be released from the legal obligation to repay most of the debts you had when you were declared bankrupt. Certain types of debts will not be forgiven such as alimony, support payments or court-imposed fines, penalties or restitution orders.
Obtaining a discharge will take nine months or longer, depending on your situation and your cooperation with the Licensed Insolvency Trustee throughout the process.
What happens to your credit rating if you file a proposal or declare bankruptcy?
Consumer proposal and bankruptcy records remain public
When you file a proposal or declare bankruptcy, your name becomes part of public bankruptcy and insolvency records. These records are accessible to anyone who makes a request for the information.
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How Does Debt Settlement Work
Debt settlement companies will try to negotiate a better payment plan with your creditors. They may also try to settle or reduce your debt on your behalf. These services come with a fee, which is usually a percentage of the amount you would save on the settled debt.
The company could try to negotiate for a lump-sum payment thats less than the amount you owe. If the creditors agree, you must make at least one payment to your creditors for the settled amount. The company will then charge you for the services provided.
During the negotiation process, some settlement companies may tell you to stop paying your creditors until you reach an agreement.
What Are The Costs And Fees Of A Consumer Proposal Versus Filing For Bankruptcy
When doing a consumer proposal, the LIT’s fees are included in the payment you negotiate with your creditors. For example, if your CP has you paying $400 per month for 60 months, the LIT’s fees are taken from those funds. However, if you were to file for bankruptcy, the cost is determined by any surplus income you might have , any assets that you may want to retain, and the monthly contribution to cover the administration costs. If there is no surplus income or assets, the bankruptcy fee can be approximately $1,800.
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Could Debt Settlement Be The Answer
Debt settlement is a broad term and can mean many different things. Bankruptcy and consumer proposals could be considered forms of debt settlement. In most cases, however, agencies offering debt solutions will advertise debt settlement plans. These companies often promise the world but deliver poor results.
To begin with, these agencies simply cannot guarantee that your settlement will be accepted. Because these services are not rendered by Licensed Insolvency Trustees, their employees are not able to guarantee creditor protection from collection calls, wage garnishment, or aggressive legal action. Because most agencies will advise you to stop making your scheduled payments and it can be several months to years before they approach your creditors with a settlement offer, this means you will be hounded by creditors. The process can take several years, and there are often hidden service costs. These agencies will typically not make contact with your creditors until a significant amount of money is accumulated. As a result, it offers a rather unsettling form of debt settlement.
How Consumer Proposal Could Be A Better Solution Than A Bankruptcy
Over the past few years there has been a significant uptake on filings of Consumer Proposals by Canadians requiring debt relief. In fact the OSB, Office of the Superintendent of Bankruptcy, has reported that over 70% of insolvencies filed in 2021 were not bankruptcies but instead consumer proposals.
We have found more people are aware of the existence of a proposal in the last few years. This in part is due to overwhelming change in marketing and exposure by Licensed Insolvency Trustees. Once the client begins discussions on their specific debt issues, they often want to know the benefits of a consumer proposal vs bankruptcy.
Given that each situation is unique, we must point out that there is no one size fits all solution in determining whether a proposal is best for you or a bankruptcy is the only option. Bankruptcy is a drastic and serious solution, avoiding bankruptcy is preferred for good reason.
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Comparing Monthly Reporting And Duties
Bankruptcy Duties: Once you declare bankruptcy in Canada, you are required to complete a monthly budget for all income and expenses, as well as supply copies of your pay stubs to your trustee. This information is used to determine if you are required to make surplus income payments.
Proposal Duties: In a consumer proposal, you have no monthly reporting tasks. You do not need to advise your trustee of any changes to your income.
In both options, you are required to attend two credit counselling sessions.
Pros And Cons Of Debt Settlement
There are obvious perks to going with a debt settlement program. These programs help consumers reduce their debt. They also help consumers better manage the debt after settlement.
Reducing debt can help consumers stick to their budgets and make timely payments in full every month. Rather than making minimum payments on all their bills, they can dedicate more of their money to making full payments. This can help them pay down their debts faster.
But in addition to the advantages, there are also some drawbacks to be aware of. Consumers should weigh the pros and cons before choosing this avenue. There may be other programs available that might be more suitable.
Pros of Debt Settlement
- First settlement can take as long as 6 months
- May have taxes to pay on the portion of the debt thats not repaid
Again, its important for consumers to be diligent about choosing a debt settlement program. They should also be vigilant about the company they choose to work with. This will help ensure that their best interests are kept in mind.
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Debts Eligible For A Consumer Proposal
A consumer proposal can be used for most types of unsecured debt. This includes:
- Store credit cards or credit lines
- Unsecured personal loans
- Collection accounts
You cannot include court-ordered debts, such as alimony or child support arrears. You also cannot include student loans that are less than seven years old.
Secured debtsthose debts that have collateralcan not be part of a consumer proposal. This includes:
What Is Personal Bankruptcy
During the personal bankruptcy process, rather than paying off your debts with financial repayments you legally surrender all of your assets to a Licenced Insolvency Trustee, who will then exchange them with your creditors to eliminate your debts.
To be eligible for personal bankruptcy in Canada a person must only meet two criteria:
The goal of bankruptcy is to give a person a fresh start, and not to punish them or to humiliate them, which is why some assets are exempt from the bankruptcy process.
Exemptions can vary from each provincial government to the next, but in general, personal items such as clothing and household items below a certain value will not be included in the proceedings, and in some provinces, cars below a certain value and house equity are also exempt.
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What Is Consumer Proposal
Its usually a last resort before filing for bankruptcy. If other debt management programs havent worked, a consumer proposal might be an option.
A Licensed Insolvency Trustee will negotiate with your creditors to arrange for a partial repayment of the debt you owe. The proposal will request that your debts be alleviated to a certain extent. It could also request that your interest rate be lowered on whatever debt amount you still owe.
The amount that the Licensed Insolvency Trustee will propose to your creditors will depend on your income and what you own. Consumer proposals are attractive options for consumers because they can reduce the amount of debt owed.
Consumer proposals are legally binding. That means both you and your creditors are entering a contract. This agreement will immediately protect you from debt collectors and collections calls.
With a debt consumer proposal, you agree to pay a part of what you owe. In turn, your creditors will agree to forgive the balance.
How Is Debt Repayment Different Between A Consumer Proposal And Bankruptcy
In a consumer proposal , you will reach an agreement with your creditors where you pay only a portion of the debt owed to them, or you can extend the time you have to pay off the debt, or do a combination of both. The maximum time for a CP is 60 months. The amount you pay is based on your income and assets you dont get to choose the amount you pay back. For your creditors to accept the CP, they will want to receive more funds than they would recover if you had filed for bankruptcy instead.
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Impact Of A Consumer Proposal & Bankruptcy On Your Creditthe Story You May Not Have Heard
One of the worst things you can possibly do for your credit is to file a consumer proposal or file for bankruptcy. Both have the same effect on your credit and typically remain on your credit reports for roughly the same length of time. A consumer proposal typically takes around 5 years to pay off and then the record lasts on your credit report for another 3 years after that. So its normal for a proposal to impact someones credit for around 8 years even with a credit repair program. Bankruptcy payments last for 9 to 21 months. After that, the record stays on your credit report for 6 to 7 years depending on your province. So a first-time bankruptcy can impact your credit for 7 to 9 years.
People who sell proposals will usually split hairs about the difference in how a proposal is reported on your credit reports versus a bankruptcy. Technically, debts included in a proposal will report as an R7 on your credit reports and debts included in a bankruptcy will report as an R9 . But this is only half the story. The other half is that your credit report also displays a special warning notifying creditors that you have become insolvent and have received court ordered protection.
Consumer Proposal Pros And Cons
|You can get out of debt for less than the full amount owed.
|Consumer proposals are more expensive than other debt relief options, such as a debt management plan.
|You repay your debt with one consolidated payment, which is easier to manage than juggling multiple payments.
|The proposal becomes part of a permanent public record.
|The stay of proceedings granted by filing a proposal protects you from collection acts, such as lawsuits and wage garnishment.
|Paying off debt with a consumer proposal will negatively affect your credit.
|You will get out of the unsecured debt you owe in 60 payments or less.
|The agreement is legally binding, so if you break it you will not receive a refund on the fees that you paid.
|You avoid the more severe credit damage caused by bankruptcy, debt settlement, or simply leaving your debt unpaid.
|You can protect assets, such as your home and car, from getting sold during bankruptcy.
|Once agreed upon, your payments are fixed and will not go up, regardless if your financial situation improves.
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