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Difference Between Consumer Proposal and Bankruptcy

When it comes to finding a debt solution that works for you, it can be an incredibly difficult time. But there are options out there for many different financial situations that can help you find relief and peace of mind. Consumer proposals and bankruptcy can seem intimidating and stressful on the surface, but they are actually both effective debt solutions that can help provide immediate relief from debt as well as legal protection from creditors.

But it’s important to understand the distinct difference between the two, as there are different implications and benefits associated with both. Understanding each solution can help navigate your way back to financial stability.

Both of these options will require the expertise of a Licenced Insolvency Trustee (LIT for short). LITs are free to speak with initially and they are the best person to turn to help you with your unique financial situation as well as guide you through the process of either solution depending on which one would be the most beneficial for you.

What is a Consumer Proposal?

A consumer proposal is a formal agreement between you and your creditors that is legally binding and drawn up by a Licensed Insolvency Trustee. The LIT will help you negotiate the terms of your debt repayment. This proposal or agreement states that you will pay part or all of your debt. The consumer proposal must be less than $250,000 (and excludes your mortgage) and also states your repayment will be at a reduced rate over a specified period of time.

One of the main benefits of consumer proposals is that they are legally binding and protect you from debt collectors. They also protect your assets and stop wage garnishes as well as interest on your debt from accumulating from the day you file.

Consumer proposal Characteristics

  • Maximum of $250,000 in unsecured debt (excluding mortgage)
  • A negotiated settlement, usually starting at 20% of your debt, is divided into monthly payments 
  • Can have a duration of up to 5 years with no penalty for early termination       
  • No monthly reporting duties required     
  • Keep all assets       
  • R7 rating remains on credit for 3 years after completion of 6 years after filing, whichever comes first 

What is Bankruptcy?

Bankruptcy is a structured legal process that relieves you of your debts from creditors. A LIT will be assigned to your bankruptcy claim to take over your assets (with very limited exceptions), investigate your affairs, and also monitor your progress for bankruptcy duties.

When you complete these duties, which also include attending two crediting counseling sessions as well as filing monthly reports on your income and expenses. You will be discharged from your debt in 9 to 21 months.

With bankruptcy, there is no limit on the amount of debt that can be included. The only prerequisite is a debt of $1,000 or more. When you file for bankruptcy, usually you are discharged within 9 months but the process can potentially take up to 21 months depending on your income. If you file for bankruptcy twice, the process can take up to 36 months. Bankruptcy can actually get you back to rebuilding your credit sooner.

Bankruptcy Characteristics

  • Minimum of $1,000 of unsecured debt
  • Monthly payments based on your average monthly income, in accordance with government regulations
  • 9 months or 21 months based on income
  • Monthly reporting on budget and income required
  • Surrender non-exempt assets
  • R9 rating remains on credit 6 to 7 years after completion

Consumer Proposal vs. Bankruptcy: Deciding Between the Two

Now that we have defined both bankruptcy and consumer proposals, it’s important to compare them side by side. Both solutions are legally binding but a consumer proposal is less severe than claiming bankruptcy. This is reflected in the credit rating as a consumer proposal is an R7 and bankruptcy is an R9. Both solutions take into account your income and your monthly payment will be hinged upon that.

A consumer proposal allows you to keep more of your assets and has less of an effect on your credit score. It also stays on your credit record for less time than bankruptcy. If you file for bankruptcy, you surrender your assets in exchange for the elimination of your debts.

There are important differences between the two with respect to the duration of the agreement, the cost, the impact on your credit as well as the minimum debt requirements. When it comes to deciding what’s best for your financial situation, it really depends on the assessment of your overall situation.

Ajeet Sharma, the founder of Financegab and a well-known name in the field of financial blogging. Blogging since 2017, he has the expertise and excellent knowledge about personal finance. Financegab is all about personal finance which aims to create awareness among people about personal finance and help them to make smart, well-informed financial decisions.


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