Bankruptcy vs Consumer Proposal : Which to Choose?

If your debts keep piling up, you may be looking for a permanent solution. Fortunately, in Quebec, the law provides two solutions to help you get back on your feet financially: the consumer proposal and bankruptcy.

While these debt relief options offer many advantages, they are not without their drawbacks. This article explores their strengths and weaknesses to help you choose the one best suited to your needs.

Consumer Proposal: A Strategic Solution

The consumer proposal, governed by the Bankruptcy and Insolvency Act, is an effective solution to debt. To take advantage of it, the first step is to meet with a licensed insolvency trustee.

What Is a Consumer Proposal?

A consumer proposal allows you to settle your debts by repaying only part of the original amount (usually between 30% and 70%). It offers a clear payment structure that can be spread over a period of up to 5 years.

During your initial consultation, your licensed insolvency trustee will assess your financial situation to develop a customized plan. Together, you’ll determine a realistic repayment plan based on your ability to pay. It’s important to note that only your overall financial situation will be taken into account in this analysis. The extent of your debts will have no impact on the amount of your payments.

If you would like to find out more about the consumer proposal and whether it’s right for you, please don’t hesitate to contact our team.

The Benefits of Consumer Proposal

The consumer proposal offers multiple advantages to indebted people, including :

• Reduction of the total amount of debt: the licensed insolvency trustee negotiates a substantial reduction of the debt with the creditors. This allows the debtor to repay only between 30% and 70% of the original amount.
• No interest on payments: no interest accrues during the consumer proposal. Interest on debts ceases as soon as the proposal is filed by the trustee.
• Customized payments: the size of the debt has no impact on the amount to be paid monthly. For example, if the trustee determines that the debtor can make monthly payments of $500, the payments will be set at $500. The goal is to ensure that the debt is repaid without preventing the indebted person from providing for his or her needs.
• Reduced impact on credit rating: although the impact of a consumer proposal on a credit report is significant, it is less than that of bankruptcy. What’s more, compliance with payment obligations throughout the proposal period can help the debtor improve his or her credit score.
• Avoid bankruptcy: a consumer proposal is an alternative to bankruptcy. Bankruptcy can have major consequences for certain professionals. Doctors, lawyers and dentists in particular risk their right to practice when they go bankrupt. A consumer proposal is therefore an effective solution for restoring your financial situation while avoiding such consequences.

The Disadvantages of Consumer Proposal

The advantages of a consumer proposal are undeniable. That said, this procedure also has its drawbacks:

• Length of process: a consumer proposal can take longer than a bankruptcy. While this may be a relief to some, it may seem excessive to others who want a quicker resolution. Committing to monthly payments over such a period can be restrictive.
• Eligibility of debts: some debts cannot be included in a consumer proposal. Recent student loans (contracted within the last 7 years), alimony and fines are among the ineligible debts.
• More costly solution: a consumer proposal is a more costly solution than bankruptcy, as it requires the debtor to repay a portion of his or her debts. To qualify, debtors must demonstrate that they have a stable income that enables them to meet their repayment obligations.

Personal Bankruptcy: An Option of Last Resort

Personal bankruptcy may be considered in cases where a consumer proposal is not an option. This procedure, governed by the Bankruptcy and Insolvency Act, offers heavily indebted individuals a  fresh start.

What Does Personal Bankruptcy Entail?

Personal bankruptcy is a legal process that allows the majority of a person’s debts to be written off. If eligible, credit card debts, personal loans, lines of credit and mortgages can be eliminated. This solution enables over-indebted individuals to free themselves of a major financial burden and start afresh on a healthier footing.

The Positive Aspects of Personal Bankruptcy

Although bankruptcy is a last-resort solution, it does offer a number of advantages for people with excessive debt.

• Permanent elimination of debts: bankruptcy permanently eliminates debts, freeing the individual from his or her financial obligations. This procedure offers a chance to turn the page, regain control of one’s finances and build a brighter future.
• Fast-track process: a first personal bankruptcy lasts between 9 and 21 months, while a second lasts between 24 and 36 months. During this period, the debtor must meet certain obligations, including attending financial and credit counseling sessions and submitting monthly income tax refunds or returns. Discharge from bankruptcy is automatic if all conditions are met at the end of the bankruptcy period.
• Creditor protection: creditors are obliged to communicate only with the licensed insolvency trustee from the moment he or she becomes involved in the case. Filing for bankruptcy places the debtor under the protection of the Bankruptcy and Insolvency Act. As a result, seizures and legal proceedings are, for the most part, halted. Only actions by secured creditors or creditors with court authorization, and seizures for alimony, can continue.

The Negative Aspects of Personal Bankruptcy

Personal bankruptcy offers debtors a fresh start. However, its negative repercussions should not be underestimated.

• Impact on credit rating: one of the main drawbacks of bankruptcy is its impact on credit rating. A first bankruptcy remains on the credit file for 6 years after discharge, while a second remains there for 14 years. Unfortunately, this makes it more difficult to obtain new loans.
• Potential loss of certain assets: certain assets may be liquidated during the process. However, essential assets, such as those required to carry out a professional activity, are exempt from liquidation.
• Financial restrictions during bankruptcy: the debtor must comply with certain rules throughout the entire process. Income restrictions are severe, especially regarding surplus income payments, and the duration of bankruptcy could increase if the debtor earns more than the threshold set by the government.
• Debts exempt from bankruptcy: not all debts can be included in a bankruptcy. Secured debts, i.e. debts secured by an asset such as the debtor’s principal residence, are generally exempt. Unpaid alimony, recent student loans (less than 7 years old), as well as criminal fines and penalties are other examples of debts that cannot be erased by bankruptcy.

Despite its many advantages, personal bankruptcy is not without consequences. This solution also has several strict eligibility criteria, which means that not everyone in financial difficulty will qualify for it.

What Is the Best Solution for You: A Consumer Proposal vs a Bankruptcy?

There’s no simple answer to this question. Both solutions offer advantages and disadvantages, so a preliminary assessment is essential to determine which is best suited to your situation. This review, conducted by a licensed insolvency trustee, will provide a detailed picture of your needs, context and priorities, and enable you to select the solution that’s best for you.

In general, the consumer proposal is preferred by individuals who own assets whose value exceeds that of the debt, or who have already declared bankruptcy in the past. It is also preferred by professionals who may lose their right to practice by declaring bankruptcy.

Personal bankruptcy, on the other hand, is a last resort when debt levels are so high that no other solution is conceivable.

Before making any decisions, it’s essential to assess your financial situation in consultation with a qualified professional. A licensed insolvency trustee will help you explore all available options and choose the one that’s right for you.

At M. Roy & Associés, the first consultation is always free. We answer your questions and find a solution in less than 30 minutes to help you overcome your financial worries. Contact our team today to regain control of your finances.