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What Is The Difference Between Bankruptcy And Consumer Proposal

How Filing Impacts Your Credit History

What is Difference Between a Consumer Proposal and Bankruptcy?

Consumer Proposal: After filing a Consumer Proposal an R7 credit rating will show for three years after the proposal is finished, or six years after the date your Consumer Proposal started whichever is soonest. A similar rating and length of time is given for traditional and non-profit credit counselling programs.

A person can start rebuilding their credit at any time, there is no need to wait for the Consumer Proposal or bankruptcy to expire from credit history.

Bankruptcy: After filing a personal bankruptcy an R9 credit rating will be noted for six years following completion . Credit bureaus can report most negative information such as a late payment or collection accounts for up to seven years after the occurrence. By following the correct steps to rebuild credit, most people can significantly improve their credit rating in as little as two-three years after bankruptcy discharge.

To learn more about these Consumer Proposal and bankruptcy differences, view our detailed infographic comparing Bankruptcy versus Consumer Proposals.

Ready to find out if a Consumer Proposal or personal bankruptcy could be your debt solution? Book your free confidential debt consultation in one of our BC locations today.

Consumer Proposal Vs Bankruptcy Know Your Options

Consumer proposal vs bankruptcy conversations may leave you more confused about your financial situation. Canadians have a growing willingness to file consumer proposals instead of bankruptcy protection. The Canadian government aimed to give consumers a way out of debt without losing their assets. The consumer proposal has been a popular way for individuals with debt to deal with their debt burden.

The consumer proposal is similar to bankruptcy in several ways, including its effect on your credit. Moreover, since individuals with large debt burdens routinely turn to a consumer proposal or bankruptcy after they find that they are not good candidates for other debt relief options such as consumer credit counselling or debt consolidation, it is good to have an understanding as to why one might choose a consumer proposal over bankruptcy or vice versa.

Consumer Proposal Vs Bankruptcy: Credit Scores

  • It probably goes without saying that bankruptcy results in the lowest credit rating, also known as a score of R9. This score will remain on that persons report for anywhere from 7 to 14 years.
  • Consumer proposals do have an impact on credit rating, but not as drastically. A consumer proposal is associated with an R7 rating, which remains on that credit report for up to 3 years after the proposals completion.

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Get A Professional Assessment Of Your Debt Situation

Your job is to educate yourself.

If you are carrying a large amount of debt, speak to a professional. You can find experts by searching in your city.

We also have offices across Canada, which you can talk to on the phone, email, or meet in-person.

What does an expert know that you dont?

They will teach you about debt restructuring options such as debt consolidation, consumer proposals, informal proposals, and how to approach your creditors with a restructuring offer.

They will also be able to analyze the type of debt you carry and educate you on the right choice for you.

You can sometimes reduce your debt with restructuring, get out of debt by creating a solid budget and for others, bankruptcy might be the right choice.

Heres a list of our offices in your city. Ontario

What Is The Difference Between A Consumer Proposal And Bankruptcy

Bankruptcy vs Consumer Proposal

There is much confusion today regarding the differences between a consumer proposal and a bankruptcy.

They both fall under the Bankruptcy and Insolvency act and allow you to extinguish unsecured debts but there are some very important differences which I have illustrated below:

Consumer Proposal

A consumer proposal is an offer you can make to your creditors to pay off the debt as an interest free payment over a period of up to 5 years. Very often your creditors will accept less than what you owe depending on your financial circumstances. Usually you will need to offer more than what the creditors would have otherwise received had you filed for bankruptcy.

When you file a consumer proposal with a trustee in bankruptcy:

  • Your assets are fully protected from your unsecured creditors
  • Interest stops on your unsecured debts

Consumer Proposals can eliminate the following debts:

  • Mortgage shortfalls


When you file for bankruptcy your assets are not protected and are assigned to a trustee in bankruptcy in order to pay off your unsecured debts . Also a portion of your income may be taken each month by the trustee in order to pay your creditors.

In summary a consumer proposal allows consumers to make an offer to their creditors to pay back what they owe through a fixed, interest free, monthly payment while protecting their assets.

This is a very brief summary but remember professional advice should be sought before making any decisions as to best course of action.

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Assets You May Have To Give Up Or Pay For

With a consumer proposal, you technically arent required to give up any assets, but things arent always that simple. For creditors to accept the offer your trustee is proposing to them, the trustee must offer them more money than they would receive if you filed for bankruptcy.

With bankruptcy, you may of course be required to give up certain assets. What you have to give up depends on the value of your assets and the guidelines of the province you live in. Generally speaking, youre usually allowed to keep the stuff you own in your house, a vehicle as long as it isnt worth very much, and your home as long as you only own a small amount of equity in it. Tradespeople and farmers are also able to keep certain tools and equipment that they need to generate an income up to certain values. For more details and to find out what you would specifically have to give up, you should speak with a bankruptcy trustee.

Beware Of The Big Debt Rip

Consumer proposals have become the latest method for a growing number of for-profit companies and their sales people to take advantage of vulnerable, unsuspecting consumers. Dont let this happen to you! Many debt relief companies are now claiming to offer consumer proposals as an easy way to get out of debt. Theres a problem. Only a licensed bankruptcy trustee is allowed to file paperwork for a consumer proposal. The debt relief companies charge thousands in fees only to refer you to a bankruptcy trustee who then charges his or her own fees.

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When Should You Choose Debt Consolidation

If you can afford the payments and have good enough credit to get a debt consolidation loan, then a debt consolidation loan might be better than a consumer proposal.

Debt consolidation usually has no negative impact on your credit rating, unlike a consumer proposal. And you are still paying back your original debtyouve just chosen a smarter route with fewer interest payments.

If you want to learn more about debt consolidation, Ive written a 101 guide here.

A Consumer Proposal The Better Solution

Credit Report Impact of Bankruptcy Vs. Consumer Proposal

A better option to consider would be a consumer proposal. If Joes creditors are willing to accept $10,000 in settlement of his debts he could offer a consumer proposal where he pays $200 per month over 50 months . The creditors vote on the proposal, and if more than half of the dollar value of the creditors agree, ALL creditors must accept the proposal.

In this case the advantage of a consumer proposal over a debt settlement are:

  • the consumer proposal is legally binding on ALL creditors once accepted
  • the creditors have 45 days to vote, so in a month and a half Joe will know if the creditors will accept his deal. In a debt settlement plan it may be a year or two or more before he knows if the creditors will accept the deal.
  • all legal action stops as soon as the proposal is filed. Joe no longer has to worry about having his wages garnisheed by the credit card companies.
  • the payment is affordable. Since a proposal could be spread out over a longer period of time, Joes payment of $200 per month was much more affordable than $500 per month.
  • Joe can pay off the proposal at any time. If he works overtime or gets a tax refund, he can apply those funds to the proposal and pay it off faster.

If you require legal protection, dont have cash in the bank and you want a reasonable monthly payment, a consumer proposal is a better debt settlement option.

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Understanding The Differences Between A Consumer Proposal And Bankruptcy

Canadian households are more in debt than ever before. With the household debt-to-income ratio reaching 164.0 per cent in the fourth quarter of 2013, it should come as no surprise consumer proposals and bankruptcies are on the rise. A total of 118,678 Canadians filed for personal bankruptcy or filed a consumer proposal in 2013, according to the federal Office of the Superintendent of Bankruptcy. While personal bankruptcy rates dropped by 3.2 per cent, consumer proposals were up by 5.4 per cent.

If youre up to your ears in debt, you may be wondering about the best way to help tackle your debt problem. Two options to consider as a last resort are filing a consumer proposal or filing for personal bankruptcy. A consumer proposal is when you make an offer to your creditors to modify your debt obligations. For example, you propose paying a lower amount of debt each month. Personal bankruptcy is a legal process in which you may be discharged of most of your debts, subject to reasonable conditions.

Although both share similarities by helping you resolve your debt situation, there are key differences to be aware of.

Eligibility: The requirement for filing a consumer proposal is a lot stricter. To qualify for a consumer proposal, your total debt cannot exceed $250,000 . You must also prove you have the ability to repay your debt under the proposal. Filing for bankruptcy is a lot more flexible if you owe more than $1,000 in debt, you can file for personal bankruptcy.

How Much Time A Consumer Proposal Takes Vs Bankruptcy

If its your first time going bankrupt, bankruptcy is much faster than a consumer proposal and a lot cheaper too if you dont own your home , dont have a valuable car, dont own other valuable assets, or have a high income. However, the effects of bankruptcy on your credit report usually last slightly longer. As we previously saw, the first time someone goes bankrupt, the court usually requires them to remain in bankruptcy or make payments to their creditors for 9 to 21 months. A typical consumer proposal, on the other hand, usually results in someone making payments to their creditors through their trustee for close to 5 years .

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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 Long Will It Last

Understand the Difference Between Bankruptcy vs Consumer ...

For a first-time bankruptcy, the process will last a minimum of nine months but depending upon your income could be 21 months. The record of your bankruptcy remains on file for between 7 years after completion of your bankruptcy and if it is your second or third bankruptcy credit reporting agencies can report if for 14 years.

The Consumer Proposal process can last up to 5 years, however, there is no penalty for paying off the agreed debt early and the credit reporting agencies will only report it for 3 years after the final payment is made.

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Consolidation Loans Vs Consumer Proposals

Whats the distinction between a consumer proposal and a debt consolidation loan? The consumer proposal process is an insolvency procedure that allows you to resolve all the amounts you owe to your unsecured creditors via an arrangement with your creditors. It does this without needing you to file bankruptcy. A consumer proposal can only be carried out by a licensed insolvency trustee. A consumer proposal allows you to get rid of all the amount owed by repaying only a part of your financial obligations over time.

A consolidation loan means that you still have sufficient assets and income and a good enough , in order to borrow the total amount you owe. The loan must carry an interest rate lower, and hopefully much lower, than the average interest rate of your combined total debt. You use the loan proceeds to repay 100% of your debts. You now have only one loan with a monthly payment you can afford. Taking out a consolidation loan is not an insolvency process.

difference between consumer proposal and bankruptcy

How Do The Terms And Conditions Compare

  • On the one hand, if you are looking for a fast-acting debt solution, bankruptcy may be your best course of action. The average Albertan filing for bankruptcy for the first time will be able to clear their debts in 9 months or less. There is a chance that your bankruptcy could last as long as 21 months this is more common with persons who have a high income.
  • On the other hand, if you would rather repay what you owe over an extended period of time, a consumer proposal gives up to 5 years to clear debts. This also means that monthly payments will be much lower. For many people, this is the most affordable course of action.

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How Long It Takes To Finish

Consumer Proposal: Because Consumer Proposals are tailored to each persons unique situation, the amount of time a persons Consumer Proposal will take can vary. A Consumer Proposal could be as short as one or two months and as long as 60 months, although Consumer Proposals that last around 24 to 48 months are most common.

Consumer Proposals can be paid off early at any time, without penalty.

Bankruptcy: The amount of time a person will be in bankruptcy for is mostly based on their income. If its the first time someone is filing a bankruptcy, it will generally be 9 or 21 months until the person is discharged .

How To Keep From Getting Ripped Off

Canadian Consumer Proposal vs Personal Bankruptcy

Follow the three tips below plus start by speaking with a member of, an association of non-profit credit counselling agencies who do not work on commission. If a consumer proposal is truly one of your best options, one of their agencies can let you know and refer you to a reputable bankruptcy trustee for free.

Ask how the person helping you is compensated. Many people who will seek to advise you on your debts work on commission. Make sure the solution theyre suggesting is in your best interest not theirs.

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What Can I Do If My Debt Is Getting Out Of Control

If you feel that your debt is becoming a problem, the first step you want to take is to analyze your spending and determine where you are spending your money and how your debt keeps increasing. Are you using your credit to make a lot of purchases? Are you only making the minimum payments on your credit card? If you can identify these problem areas, you may be able to regain control of your debt on your own by spending less and putting more each month toward debt repayment. However, if your problems persist and you are struggling to make monthly payments, it may be time to talk to a Licensed Insolvency Trustee about your options. A professional will be able to help you navigate the issues and determine if a consumer proposal or bankruptcy is your best solution to get out of debt.

Difference Between Consumer Proposal And Bankruptcy: The Proven Canadian Way To Get Debt Free

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difference between consumer proposal and bankruptcy

We hope that you and your family are safe, healthy and secure during this COVID-19 pandemic.

Ira Smith Trustee & Receiver Inc. is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.

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How Much You Have To Pay

Consumer Proposal: Similar to how long a Consumer Proposal will take to finish, how much of their debt a person will repay also varies. Its not uncommon for debts to be cut by up to 80%, and there is no fee charged on top of what is offered to creditors. The cost of the Consumer Proposal is simply taken from what the creditors will get.

For example if you owed $40,000 and offered a Consumer Proposal to repay 20%, you could pay around $220 a month total for 36 months, writing off the other $32,000.

Government-set tariffs determine fees in both Consumer Proposals and personal bankruptcy they are not billed or invoiced separately and your Licensed Insolvency Trustee will not give you a bill for their services.

Bankruptcy: A persons out of pocket cost in bankruptcy is primarily based on their income. For most bankruptcies a person will only pay the minimum filing fee, $200 per month for 9 months.


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