Published August 1, 2023 • 4 Min Read
When debt becomes unmanageable, it helps to know what options you have for dealing with it. A consumer proposal is one option; bankruptcy is another.
Both can offer relief from debt, but they work in different ways. Comparing the pros and cons of a consumer proposal vs. bankruptcy can help you to decide if either one might be right for you.
Consumer proposal and bankruptcy: How do they work?
A consumer proposal is a legal agreement that allows you to pay off debts for less than what’s owed. It’s possible to reduce and pay off up to $250,000 in unsecured debt with a consumer proposal. Debt payments can extend up to five years, though not all debts are eligible. Secured debts (debts with collateral to back them) and certain student loans can’t be included.
Bankruptcy, meanwhile, is a legal process in which eligible debts are eliminated and legally discharged through court action. Filing for bankruptcy is possible in Canada if you have at least $1,000 in unsecured debt. The typical timeframe for a bankruptcy case to be resolved is nine to 21 months, depending on your income.
Here’s a closer look at how consumer proposals and bankruptcy compare when handling debts.
Consumer proposals
A consumer proposal allows you to reduce the total debt you must repay with the help of a Licensed Insolvency Trustee (LIT). Your LIT (whom you choose) negotiates with your creditors on your behalf.
A consumer proposal lets you consolidate debts into one monthly payment. Payments are tailored to your budget and are fixed until you complete the proposal agreement. That could lighten your financial load and potentially help you get back on your feet sooner.
Initiating a consumer proposal can stop collection actions from creditors and sidestep a bankruptcy filing. And you’re not required to give up assets in order to pay off creditors. That includes assets like checking and savings accounts, investments, and home equity.
Your creditors must be on-board with a consumer proposal for you to use one. If they don’t accept your proposal, you’ll have to consider another debt solution. It can take time to set up a consumer proposal with your creditors, assuming they agree. Once in place, payments can extend for up to five years.
While not as damaging to your credit as bankruptcy, a consumer proposal may negatively affect your credit scores. Finally, certain debts, including secured debts and some student loans, can’t be reduced through a consumer proposal.
Bankruptcy
Filing for bankruptcy protection can stop creditor collection actions against you, including lawsuits. It can also halt ongoing collections, including wage garnishments, helping to relieve some of the stress of dealing with debt.
You can file for bankruptcy through a LIT, and similar to a consumer proposal, your trustee helps to guide you through the process so you’re not going it alone. Eligible debts included in your filing are eliminated, making it easier to get a fresh start financially. And bankruptcies can be resolved in a shorter timeframe compared to a consumer proposal.
Bankruptcy may be more damaging to your credit scores than a consumer proposal and remain on your credit history for a longer time period. That could make it harder to get approved for new credit, at least until your score begins to improve. Bankruptcy filings also become part of the public record, so other people can see them.
Perhaps more importantly, bankruptcy requires you to give up certain assets in exchange for eliminating debts. While there are some exemptions allowed for things like RESPs and RRSPs, you may have to surrender other assets such as home equity or tax refunds.
Choosing between a consumer proposal or bankruptcy?
Whether it makes sense to choose a consumer proposal or bankruptcy can depend on your financial situation. If you would prefer to keep your assets and you have the means to pay something towards your debt, then a consumer proposal could be a good fit. On the other hand, if you have limited income or an overwhelming amount of debt, then you might consider a bankruptcy filing instead.
Talking to a financial planner or debt counsellor can help you weigh the options. You may also consider other alternatives, such as debt consolidation loans, for repaying what’s owed.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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