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What is bankruptcy?
Bankruptcy is a legal process that provides an individual whose debts exceed the value of their assets and who is unable to meet his or her on going financial commitments with a solution for completely eliminating their debts. In practice, if you are in this situation, and things are unlikely to change, then a bankruptcy is an option for you.. In Canada, a bankruptcy can only be filed through a Trustee in Bankruptcy; an individual licensed by the Federal Government.
What is Consumer Proposal?
A Consumer Proposal is an option for someone who is unable to pay their debts in full, but who does have the ability to pay a portion of their debts. It is effectively a legally binding contract between an individual and their creditors that will allow the individual to significantly reduce their debts and eliminate the interest. In Canada, a Consumer Proposal can only be filed through an Administrator that is licensed by the Federal Government.
Key Features of a Consumer Proposal versus a Bankruptcy
Ownership of Assets
- In a bankruptcy, certain assets are exempt (protected), which means that no one can touch the assets and you do not have pay the Trustee to keep them. Exempt assets include RRSPs (other then contributions in the 12 months before your bankruptcy), a vehicle up to a value of $5,650, household furniture and appliances up to a value of $11,300, personal effects (clothing and miscellaneous items) up to a value of $5,650 and tools of the trade up to a value of $11,300.
In a bankruptcy you can keep your non-exempt assets by making arrangements to compensate the Trustee for their value. If you do not want to keep your non-exempt assets, then the Trustee will sell them
- Under a Consumer Proposal, you retain ownership of all of your assets, including your house, RRSPs and vehicles. In exchange for this right and benefit, you must commit to pay your creditors a fixed monthly amount for a certain period time. In most cases, your proposal will offer to pay back a total of 30% of your debts
How Long Does a Bankruptcy Last?
Depending on your circumstances, a bankruptcy can last 9 months to 21 months for someone who has never been bankrupt before; and 24 months to 36 months for someone who has a previous bankruptcy.
How Long Does a Consumer Proposal last?
A Consumer Proposal is usually done over 60 months to allow you the financial flexibility of both meeting your daily living expenses and repaying a portion of your debts under the proposal. However you have the option of paying off your proposal quicker. You could also offer to pay to pay your proposal through a one time lump sum payment.
“ Surplus Income”
- This is a technical term applicable only to a bankruptcy. Simply put, the cost of your bankruptcy depends on your average income during the bankruptcy. If your income increases during the term of your bankruptcy, your cost of bankruptcy may increase. Surplus income rules do not apply to a Consumer Proposal. Once your creditors have agreed to your proposed settlement then that amount does not change. If your income increases, the cost of your Consumer Proposal DOES NOT increase and you can keep your increased income.
Protection from your Creditors
- Protection under both of these options is similar. Once you file a Consumer Proposal or a bankruptcy, you get complete protection from your creditors. They can’t call, they can’t collect their debts. A Consumer Proposal or a Bankruptcy prevents creditors from starting a legal action; and even if a legal action has already been commenced, a Consumer Proposal or Bankruptcy stops that process.
Impact on Credit Score
- For someone who files a bankruptcy for the first time, the bankruptcy will be on record with the credit bureau for 7 years.
- A Consumer Proposal is on records with the credit bureau for 3 years after it is completed.
Use of a Secured Credit Card
- While you are in bankruptcy, if you apply for new credit over $500, you have to volunteer the fact that you are bankrupt. After you are out of bankruptcy, you do not have to volunteer that information.
- If you apply for new credit while you are doing a Consumer Proposal you do not have to volunteer that fact