Consumer Proposal vs. Personal Bankruptcy: Which Option Works Best?

Although nearly a quarter of Canadians managed to eliminate their personal debts in 2013, there are still millions out there who are under tremendous pressure to resolve their debt issues. The average Canadian can choose between resolving their debts through a personal bankruptcy or a consumer proposal. Knowing which option is best for your financial situation is a crucial part of getting yourself back on track towards a debt-free future.

Choosing A Consumer Proposal Over A Bankruptcy

Consumer proposals represent a viable alternative to the typical personal bankruptcy. This option involves negotiating an arrangement with your creditors to pay down part of your unsecured debt while stopping repeated debt collection attempts. These considerations are usually done through a licensed bankruptcy trustee acting as a consumer proposal administrator.

There are several reasons why you'd want to choose a consumer proposal over a personal bankruptcy:

  • Under most consumer proposals, your payments remain the same even if your income increases due to changing financial circumstances. This option gives you greater financial flexibility in comparison to a bankruptcy, which requires you to report your income on a monthly basis.
  • Successfully fulfilling the terms of a consumer proposal will net you a R7 credit rating instead of a R9 credit rating after the bankruptcy proceedings. In addition, your R7 credit rating only lasts for 3 years on your credit report, instead of the 7 to 14 years it takes for an R9 rating to go away.
  • A consumer proposal also allows you to retain all of the tax refunds and credits owed to you, instead of having them confiscated to satisfy debts owed during a bankruptcy.

Consumer proposals also allow you to retain certain assets that would otherwise be lost in a personal bankruptcy. For instance, you may end up losing a vehicle that you rely on to get to and from work as a result of bankruptcy proceedings. A consumer proposal allows you to keep this and other valuable assets you rely on for your employment and well-being.

When You Should File For Bankruptcy Instead

Despite how filing a personal bankruptcy may be unfavorable in many cases, there are still instances where you're better off filing one instead of a consumer proposal:

  • If you owe more than $1,000 in debt but have few means of repayment.
  • If you require financial relief but have little to no time to negotiate with creditors.
  • If you've explored all other debt relief options but found none that works for your situation.
  • If your creditors reject all of your consumer proposals.

If you are under intense pressure to relief your financial burden but lack the financial ability to maintain a payment plan under a consumer proposal, you may be better off filing for bankruptcy. Under most circumstances, doing so puts a stop to collection attempts and gives you enough time to make financial preparations for dealing with secured creditors. Depending on your income level and personal assets, a personal bankruptcy may release you from your obligation to repay unsecured creditors.

A personal bankruptcy may also be your only option left if the consumer proposal collapses in the event of nonpayment. In most cases, missing 2 or more payments can be grounds for a creditor to dissolve a proposal. Not only won't you be able to draft another proposal, but your creditors may reject future proposals based on these grounds.

It's important to research all of your options and to seek wise counsel when deciding between a personal bankruptcy or consumer proposal. Your bankruptcy attorney may be able to provide some well-needed insight and timely advice that pertains to your legal needs. Click here for info about dealing with this kind of issue.


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