Bankruptcy and consumer proposal: key differences explained

In short

Bankruptcy involves handing over your seizable assets to pay your debts, while a consumer proposal is an agreement reached with your creditors.
After filing for bankruptcy, you make monthly payments based on your income. Under a consumer proposal, you make fixed payments.
A first bankruptcy lasts for nine or 21 months while a consumer proposal process can take up to five years. Bankruptcy remains on your credit report for longer .
Bankruptcy is often perceived as a last resort, but it allows you to start over.

Your personal situation will determine what the best option is for you.

Understanding the solutions

What is bankruptcy?

Personal bankruptcy involves handing over your seizable assets to pay your debts. This process is fast and it allows you to start over.

In the case of a first bankruptcy, you’ll be automatically discharged from your debts after nine months. If you have surplus income, this will happen after 21 months.

In 90% of cases, bankruptcy eliminates all your debts.
Bankruptcy can be a good solution for anyone who is tired of living with debt and wants to be freed from it quickly.

What is a consumer proposal (or proposal to creditors)?

A consumer proposal is an agreement reached with your creditors that allows you to settle most of your debts.

With the help of a Licensed Insolvency Trustee, you must submit a detailed repayment plan to your creditors.
Your payments may be spread out over a period of up to five years.
The repayment plan must be accepted by a majority of creditors before it can be implemented.
If the proposal is accepted and you meet the conditions, you’ll avoid bankruptcy.

How do each of these solutions impact your assets?

Bankruptcy:

Your assets can be seized and liquidated by the trustee, unless they’re leased or held as collateral on a loan;
The funds from this sale are then distributed among your creditors;
A portion of your salary may also be withheld to pay off your debt;
However, you should note that certain types of assets such as RRSPs and life insurance are protected.

Consumer proposal:

You can keep your assets.

What is the timeline for these two solutions?

Bankruptcy: A first bankruptcy can last for nine or 21 months and a second bankruptcy for either 24 or 36 months. The duration depends on your income.

Consumer proposal: The process can take up to five years.

What are the impacts on your credit score?

Bankruptcy: A first bankruptcy remains on your credit report for six or seven years and subsequent bankruptcies are removed after 14 years.

Consumer proposal: The timeline is significantly shorter. A consumer proposal remains on your credit report for up to three years after your final payment or up to six years after signing the proposal.

What payments do you have to make to settle your debts?

Bankruptcy: You make monthly payments based on your income.

Consumer proposal: The trustee negotiates a fixed payment amount with your creditors.

How does debt affect you?

Living with debt can be incredibly difficult. It can impact you in ways that go far beyond figures and financial obligations. Debt can severely affect your wellbeing. It often causes ongoing stress and a feeling of isolation and stirs up difficult emotions such as anxiety, guilt and shame.

Over time, this emotional weight can also impact your physical health. Some individuals notice muscular tension, digestive issues and extreme fatigue. Your emotional stability could also be undermined and make you feel more irritable, anxious or agitated on a daily basis.

It’s important to remember that these reactions are normal and they don’t define you as a person. They simply reflect the mental and emotional weight of a complex financial situation.

Fortunately, there are solutions such as bankruptcy and consumer proposal.

Summary table – bankruptcy and consumer proposal

	Personal bankruptcy	Consumer proposal
Assets	Non-exempt assets are seized	Keep your assets
Duration	1^st bankruptcy: 9 or 21 months and 2^nd bankruptcy: 24 or 36 months	Up to 5 years
Credit score	1^st bankruptcy: 6 or 7 years and subsequent bankruptcies: 14 years	During the agreement term and up to three years after the final payment
Payments	Monthly payments based on your income	Fixed monthly payments
Advantages	Immediately puts an end to calls from creditors and salary seizure Certain assets cannot be seized Cannot be refused by your creditors The process is faster than a consumer proposal	Immediately puts an end to calls from creditors and legal action on their part Fixed payments without interest You retain your credit cards with a zero balance
Disadvantages	Certain assets can be seized Creditors can object to the debt discharge and require a court hearing Negatively impacts your credit rating for six years after the process	Takes longer to repay your debts Is not always accepted by creditors Can be annulled if you don’t make your payments

Which option allows you to settle your debt quickly?

Personal bankruptcy: It’s the fastest way to clear your debt, but it can seriously damage your credit rating and some of your property may be seized.

A consumer proposal: The process takes longer, but it allows you to retain your assets while reimbursing a portion of your debts based on your budget.

Choosing one of these two options depends on your situation and priorities. Do you want to quickly settle your debts or would you prefer to retain your assets while making reasonable monthly payments? Bear in mind that if your finances no longer allow you to honour the terms of a consumer proposal, you can file for bankruptcy at any time.

One of our Licensed Insolvency Trustees can help you evaluate which option is best for you with confidence and without judgment.

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