Exploring the Differences Between a Consumer Proposal and a Bankruptcy

In today’s constantly shifting economic landscape, many Canadian households from coast-to-coast are struggling to keep up from one payment to the next, let alone keep up with an ever-increasing cost of living. To compensate, many have relied on credit to carry them through financial difficulties. While credit can be an incredible tool, credit reliance can quickly lead to a dangerous cycle of debt and stacking interest that seems impossible to get out of.

Sound familiar? If debt has taken hold, it’s important to understand that you’re not alone and you have options. For eliminating debt all-together, two widely used options to Canadian households are bankruptcy and Consumer Proposals. While many people have a basic understanding of what a bankruptcy entails, the details behind filing for a Consumer Proposal are not as widely understood.

There are several differences between a Consumer Proposal & bankruptcy. Although both filings are legislated under the Bankruptcy and Insolvency Act (also known as the BIA) and must be filed by a Licensed Insolvency Trustee, these are two separate processes.

First, a Consumer Proposal is an arrangement made with your creditors. In most cases with a Consumer Proposal, you are able to retain all of your assets.  Furthermore, debtors who would like to retain their non-exempt assets like non-exempt vehicle or non-exempt equity in their home are able to make arrangements with their creditors to pay an amount over a period of time instead of filing for bankruptcy. In the case of a bankruptcy, only certain assets are exempt (it should also be noted, exemptions on assets also depends on provincial legislations where you reside).

Secondly, the process of filing a Consumer Proposal is different from that of a bankruptcy. Generally, no court appearances are required. Creditors have 45 days to vote on the Consumer Proposal and have the option to accept, refuse or request a meeting of creditors. The initial Consumer Proposal filed can be amended if the creditors do not agree with the terms.

Thirdly, once a Consumer Proposal has been accepted by the creditors, your only other requirements are to attend two counselling sessions. As long as the terms of the Consumer Proposal are being met, the Administrator or the Licensed Insolvency Trustee will not monitor your income, expenses or any disposition of assets. In a bankruptcy, a Trustee will monitor the bankrupt’s income throughout the process and will be required to file certain income tax returns for the bankrupts. Trustees may also be required to seize any acquired properties in a bankruptcy scenario.

Fourthly, a significant difference between a Consumer Proposal and bankruptcy is the impact it can have on your credit rating. Bankruptcy is registered as an R9 and will remain for six years after receiving your certificate of discharge. A Consumer Proposal however, will be reported as an R7 and will stay on your credit bureau for three years after receiving your Certificate of Full Performance.

Many individuals may wish to avoid bankruptcy for a number of reasons which could include stigma, legal implications (an inability to sponsor while undischarged for example), business ramifications or disclosure requirements in retaining professional designations. 

When you’re struggling from one payment to the next, understanding which route to choose can be daunting. A Licensed Insolvency Trustee can help you understand your options so you are able to make a fully informed decision as you work towards a stronger, debt-free future. 

Nora Edwards is a Licensed Insolvency Trustee with MNP Ltd. serving clients in Burnaby, Port Moody and Port Coquitlam. To learn more about how Nora can help, contact her at nora.edwards@mnp.ca or 778-374-1850.

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