Bankruptcy vs. Consumer Proposal: Which Debt Solution is Right For You?

For years, the number of Canadians filing for debt relief has been climbing and climbing fast. Nearly 10% more Canadians filed for insolvency in 2019 than in 2018, making it the second-highest year for insolvencies on record. 

Now, with COVID-19 putting millions out of work across the country, that trend will only continue. If your income has been severely disrupted and you have more debt than you can handle, it could be time for you to consider declaring bankruptcy or filing a consumer proposal. 

Before you do that, however, you’ll want to fully understand the differences between these two options, as well as their impacts. While both bankruptcy and consumer proposals will provide you with debt relief, they each carry some economic repercussions that will stay with you for quite some time. 

Is consumer proposal considered bankruptcy? 

Consumer proposal is not the same as bankruptcy. Declaring personal bankruptcy and filing a successful consumer proposal both help you escape the burden of unmanageable debt, and they both provide you with legal protection from your creditors. But that’s where the similarities end.

What happens in personal bankruptcy?

In personal bankruptcy, you surrender your assets to a Licensed Insolvency Trustee who will investigate your financial affairs. The Trustee may try to turn your assets into cash to pay some of your creditors. 

When you file for bankruptcy, a Stay of Proceedings comes into effect. This means creditors can no longer harass you for payments. It also stops any wage garnishments on your earnings. 

You’ll need to carry out any financial duties established by your Trustee (such as filing back taxes), file monthly spending reports, and attend two credit counselling sessions. After completing these tasks, most people are discharged from bankruptcy and free from their pre-existing unsecured debts after either 9 or 21 months. 

Personal bankruptcy isn’t a simple “get out of jail free” card, however. It has a dramatic impact on your credit rating, which will stay with you for years. Keep reading to learn what happens to your credit score after bankruptcy. 

What happens with a consumer proposal?

With a consumer proposal, you don’t surrender your assets and work with your creditors to agree on new terms for repayment. Typically, you first meet with a Licensed Insolvency Trustee, who will assess your situation and help you draft a proposal to all of your creditors, in which you offer to repay part of your combined debt. 

Your creditors have 45 days to perform a simple majority vote on this proposal. If the proposal is rejected, you can try to renegotiate. If accepted, you’ll make monthly payments until the terms of the proposal are complete. Once that happens, you’re released from all of the unsecured debts you owed when the proposal was filed. 

Does bankruptcy affect your credit differently to consumer proposal? 

Once you’re discharged from personal bankruptcy or you’ve completed the terms of your consumer proposal, you’re free from the burden of your old unsecured debts. This can be an enormous financial relief but it doesn’t come without some significant economic downsides. Both scenarios dramatically impact your credit rating and remain on your record for years. 

Between the two options, bankruptcy’s impact on your credit score is far more severe. When you’re discharged from bankruptcy, you’ll leave with a credit rating of R9—the lowest score possible. This rating will stay listed on your credit rating for at least six years after your bankruptcy. While this R9 rating is on your file, it’s next to impossible to secure loans of any kind. 

A consumer proposal, by contrast, lowers your credit rating to R7. This is the third-lowest rating possible and it only remains on your record for three years once your last payment has been made. That means the faster you complete the terms of your consumer proposal, the faster you can begin rebuilding your credit rating. 

Read more: How To Check And Dispute Errors On Your Credit Report

Bankruptcy vs. Consumer Proposal: Which one should you choose? 

Choosing between bankruptcy and a consumer proposal isn’t easy. It can be helpful to meet with a Licensed Insolvency Trustee to discuss your options and the particulars of your financial situation. In some cases, you won’t have a choice. Bankruptcy, for instance, is typically for those who are unable to repay any portion of their debts through their earnings. 

Consider the following two scenarios as prime examples. 

Scenario 1: Declaring bankruptcy 

You’re self-employed but operate as a sole proprietorship, meaning you haven’t set your business up as a corporation. Your business finances, therefore, are also your personal finances. 

Over the years, you’ve amassed considerable unsecured debt—credit cards and lines of credit—and now tragedy has struck: For one reason or another, you can no longer work. With next to no income, you can’t cover your personal expenses, business expenses, or the minimum payments (with interest) you owe on your debts. 

By declaring bankruptcy, you hope to wipe the slate clean so you can start over fresh and look ahead to your next chapter—without the burden of crippling debt holding you back. 

Scenario 2: Filing a consumer proposal 

You have a steady and well-paying full-time job and you own your own home. But you also have a dangerous online shopping habit. Similar to Scenario 1, you’ve amassed considerable unsecured debt, racking up your credit cards and continually raising your credit limit higher and higher. 

You’ve convinced yourself to stop spending needlessly, but now it’s getting hard to even make the minimum payments on your debts each month. With the interest on your debts, you have no hope of paying the amounts down and ever getting a handle on your finances. 

You don’t want to risk losing your home by declaring bankruptcy, so you file a consumer proposal instead. You hope you can convince your creditors that, with your steady full-time salary, you can commit to repaying a more manageable portion of your debts.

How to rebuild your credit after insolvency

Despite the impact insolvency has on your credit rating, it’s not all doom and gloom. There are some relatively simple ways to rebuild your credit quickly after a consumer proposal or even after bankruptcy. 

In some cases, you can even get approved for a loan while you’re going through insolvency, or while an R7 or R9 is still on your credit rating. You may need to find a consigner to help secure the loan, or you may just need to consult with the experts.