When deciding to file either one of these insolvency options, it is important that you are aware of the differences between them so you can make the best decision for your situation. Choosing the wrong option can have lasting consequences. While both bankruptcies and consumer proposals are administered under the same legislation, the Bankruptcy and Insolvency Act, they are nearly completely different processes. As a firm headed by a Licensed Insolvency Trustee, Frederick and Company Ltd. is well equipped to evaluate your situation and educate you on your options. Our goal is to empower you to make an informed decision to deal with your debt.
Both processes offer legal protection from your creditors in the form of a “stay of proceedings”. “Stay”, meaning to stop and “proceedings”, referring to the actions taken by creditors. Once the stay of proceedings is in place, it will legally halt actions taken by your creditors, meaning that they cannot call you for collections, send demand letters, withdraw money from your bank account for your debts, or garnishee your wages. The protection offered in these two processes cannot be understated; if you intend to turn over a new leaf for a fresh start, the relief from legal action and collection attempts will be a hefty weight lifted off your chest. Taking a proactive approach to resolving your debt can be quite invigorating, but it can be marred by relentless attempts by your creditors to collect from you. Approximately 48% of Canadians say they have lost sleep because of financial worries (Statistics Canada, 2019), and something as routine as answering the phone or receiving mail can be incredibly stressful. So, it’s unsurprising that financial stress can seep into other parts of your life and well-being. A stay of proceedings gives you the respite necessary to move forward, and in our experience, many people have lamented not having considered it sooner.
Both bankruptcies and consumer proposals require you to make monthly payments. The main difference, however, is that in a bankruptcy, you will vest your assets to the Trustee, who will then sell them to satisfy your debts. In a consumer proposal, you can keep your assets but will offer a settlement to satisfy your debts. Below is a more in-depth overview of some differences between a consumer proposal and a bankruptcy.
|Assets||You have control of your assets after the consumer proposal is filed||Your assets vest with the Trustee. Exempt assets (see here for more details) are protected from your creditors and the value of the non-exempt asset must be paid into the bankrupt estate.
After-acquired assets can also come into the estate if they are acquired before you get a discharge from bankruptcy
|Eligibility||A maximum of $250,000 of unsecured debt|
|Decision||Your proposal must be accepted by the majority of your creditors||The decision to file a bankruptcy is up to you; creditors do not get to vote in a bankruptcy proceeding|
|Duties||Making arranged installment payments
Attend two counselling sessions
Monthly filings of income and expense statements
Attending meeting of creditors (should one be held)
|Making arranged installment payments
Attend two counselling sessions
>Attending meeting of creditors (should one be held)
Filing monthly income and expense statements
|Length||Up to 5 years, but it can be paid off earlier if you have the means to do so without penalty||9 – 21 months for first-time bankruptcy and 24 – 36 months if you have been bankrupt before|
|Cost||The cost is based on the amount that would be payable to creditors in a bankruptcy – a consumer proposal must offer a better advantage to creditors over that provided for by a bankruptcy||Based on your ability to pay, including your income and any non-exempt assets|
|Credit rating||R7 remaining for 3 three years after you complete proposal (click here for more information about credit in Canada)||R9 remaining for 6 years from the date you are discharged from bankruptcy (click here for more information about credit in Canada)|
It’s important to know that there are certain types of debts that will survive both bankruptcies and consumer proposals:
Ongoing debts: debts that are related to the time period after the consumer proposal are not stayed. Examples of these ongoing debts would be your rent, utilities, child support, taxes for the time period after the proposal, etc. In addition, any secured debts that you wish to keep (and that you make a payment on after the date of the proposal) would continue to be your responsibility after the proposal.
Undischargeable debts: there are some debts that do not get discharged after a consumer proposal or bankruptcy. These debts are listed under Section 178 of the Bankruptcy and Insolvency Act. These debts include but are not limited to child support, spousal support, fraud, a judgment arising from intentional bodily harm, and student loans that are younger than 7 years old. If any of these types of debts apply to you, they should be discussed as part of your consultation so you are aware that they will not be written off at the end of the process. Though these debts will not be discharged at the completion of your proposal, they will be stayed (paused) during the process and creditors will receive dividends during the course of your proposal, which will reduce your amount owing after the proposal is complete.
The difference in cost between a consumer proposal and a bankruptcy:
In bankruptcy, your monthly payment is based on your income. The more you earn, the more you pay. This payment is termed your surplus income. Each year, the Office of the Superintendent of Bankruptcy Canada sets a threshold for how much money you need to maintain a reasonable standard of living. Any money that you earn above this threshold becomes your surplus income payment. This payment is used to ensure that people who declare bankruptcy and have sufficient income will contribute to paying off a portion of their debt. Your household income, the number of people who reside in your household, and whether you have filed a bankruptcy before will all factor into your surplus income payment. This surplus income payment can vary from month to month, so you will be required to file monthly income and expense statements to determine your surplus income payment.
In addition to your surplus income payment, you will vest all of your non-exempt assets to the Trustee. Some assets are exempt (protected from creditors), while other assets are non-exempt, which means that the value of that asset must be paid into the bankruptcy. This does not mean that you would have to surrender all of your non-exempt assets, but rather that the value of those assets would need to be paid into the bankrupt’s estate. This provides you with the flexibility to decide if you would prefer to give up an asset or contribute the value of the asset into the estate through monthly payments, thereby allowing you to retain the asset. Your new assets continue to vest with the Trustee until you receive a discharge from the bankruptcy. Any windfalls that come to you, such as an inheritance, lawsuit judgement, insurance payout, or a lottery winning, could be payable into the estate.
In a consumer proposal, on the other hand, the cost of the payment is based on a settlement agreement between you and your creditors. Unlike bankruptcy, this is a fixed payment that will not change depending on your month-to-month income. If you experience windfall, such as an inheritance, your proposal payment will not change, and you’ll even have the option to pay off the entire proposal with a lump-sum without consequence. In addition, a consumer proposal can spread your payment over a longer period of time (a maximum of 60 months), which can make your monthly payment more affordable.
Both consumer proposals and bankruptcies are powerful debt-relief options that offer creditor protection. Although the goal for both these processes are the same — to discharge you from your unsecured debt — they have many differences that will affect your ongoing duties, retention of assets, and financial commitments. Consequently, each case must be evaluated to determine which route is better suited. At Frederick & Company, we offer free consultations to help you determine the best path for you to get financial relief.
For more information, consult our FAQ.
Frederick & Company Ltd. offers help and guidance to those in the Greater Edmonton area who are looking for guidance to deal with their debt. Book your free consultation today.