Consumer Proposal vs Bankruptcy: What are the Differences?

When you are in debt and need a fresh start, there are plenty of debt relief options.

As the only legally binding debt forgiveness programs in Canada, a consumer proposal and bankruptcy are two popular methods to resolve your debts, but there are significant differences.

In this guide, you’ll learn the difference between a consumer proposal and bankruptcy.

What is the difference between bankruptcy and a consumer proposal?

Deciding between bankruptcy and a consumer proposal usually depends on whether you have assets to protect and your income.

Personal bankruptcy provides debt relief if you cannot afford to repay your debts, but you may need to give up some of your assets.

A consumer proposal is different. You can keep all your assets while repaying your creditors at an affordable level. That’s one of the reasons why a consumer proposal accounted for over 65% of all Canadian insolvencies in 2020.

If you have a significant income, bankruptcy costs more than a consumer proposal. Consumer proposal payments never change, even if your income changes.

There are other considerations, too, such as cost, how long it takes to complete, and the impact on your credit. The Office of the Superintendent of Bankruptcy regulates both programs.

Below, we’ll look at the key differences between a consumer proposal and bankruptcy.

	Bankruptcy	Consumer proposal
Eligibility	Maximum of $250,000 in unsecured debt (excluding mortgage)	Minimum of $1,000 in unsecured debt.
Cost	Based on your income and assets. If your income increases, you pay more.	Negotiated debt settlement. Pay what you can afford and settle your debt for a reduced amount (as low as 30%). A fixed monthly payment that never increases.
Duration	9 months or 21 months, depending on income.	Up to 5 years, but you can make lump-sum payments to complete your proposal early.
Assets	You might lose some assets, but there are exemptions.	Keep your assets.
Impact on credit	6-7 years, depending on where you live.	3 years after you’ve completed your consumer proposal or 6 years from the date you filed — whichever comes first.
Tax refund	You can keep your tax refund.	You lose your tax refund.
Duties	Yes	No

When is a consumer proposal better than bankruptcy?

A consumer proposal is usually a better choice than bankruptcy if you meet the following criteria:

• You have a stable income and want to pay a set amount that doesn’t change.
• You have assets that you want to protect.
• You can afford to make a small monthly repayment after essential bills.

With a consumer proposal, you must complete the process within five years, but the payments are spread out, so they are affordable.

When is bankruptcy better than a consumer proposal?

Bankruptcy is a last resort but could be a better option if:

• You do not have a regular income, or you are unemployed.
• You have no assets.
• You are looking to quickly relieve the burden of unsecured debts spiralling out of control, and you cannot make a monthly payment towards them.

The cost difference between bankruptcy and consumer proposal

With a consumer proposal, you pay what you can afford and complete the proposal as early as your finances allow. Even if your income rises, the monthly payments will never change.

The cost of a consumer proposal can be spread over a longer period, making the payments more affordable than bankruptcy.

When you file for bankruptcy, the cost can vary depending on your income. If you have a low income, bankruptcy payments cost less. But you are required to pay more if you earn more.

If you earn more than the income thresholds set by the government, you make surplus income payments.

How long does a consumer proposal last compared to bankruptcy?

In most circumstances, a first-time bankruptcy lasts for 9 months or 21 months if you have surplus income (which also increases the cost of your bankruptcy)

A second bankruptcy lasts 24 months or 36 months with surplus income.

You can spread out consumer proposal payments over 60 months (5 years), but you can complete the process as early as your financial situation allows.

What happens to my assets in a bankruptcy or consumer proposal?

By agreeing to pay more than you would in bankruptcy, you can keep all your assets in a consumer proposal.

In bankruptcy, you may have to surrender some assets, but depending on where you live, some items are protected through bankruptcy exemptions.

If you receive a windfall during bankruptcy, it becomes part of your bankruptcy estate, with the proceeds distributed to your creditors. In a consumer proposal, you keep it.

Is my credit score affected?

If you declare bankruptcy in Canada, any credit accounts included will be given a 9 credit rating.

For example, if a revolving credit account is included in your bankruptcy, such as a credit card, it’s reported as an R9 credit rating on your credit report.

This is the worst credit rating you can have, so naturally, this will lower your credit score.

If this is your first time, a record of your bankruptcy appears on your credit report for at least six years after discharge (and 14 years for a second bankruptcy).

If you file a consumer proposal, any credit accounts included will be given a 7 credit rating. Like bankruptcy, a consumer proposal will impact your credit score.

A consumer proposal disappears from your credit report three years after the last payment or six years from the date you filed, whichever comes sooner.

For example, if your consumer proposal takes you one year to pay, it remains on your credit report for four years. So, if you can pay off your proposal faster, your credit score will improve in a shorter time.

When your consumer proposal is complete, you will receive a Certificate of Full Performance from your trustee, which you can send to TransUnion and Equifax so that your credit report can be updated as quickly as possible.

Both a consumer proposal and bankruptcy appear in the public reports section of your credit report.

Most debt solutions impact your credit score, so don’t let it affect your decision. Even if you have a good credit score, it’s worthless when you have large debts you cannot afford to repay.

Filing a consumer proposal or bankruptcy can eliminate your debts, allowing you to improve your credit at a faster rate than you are currently able to

Will I lose my tax refund?

In a consumer proposal, you keep all tax refunds. This cash boost could give you additional money to pay off your proposal faster or help you get by while in debt.

If you declare bankruptcy, you will lose all tax refunds owed. You’ll also have to file all unfiled tax returns for previous years, plus tax returns before, during and after you file for bankruptcy.

However, the good news is you can eliminate tax debts through both a consumer proposal and bankruptcy.

Do I need to carry out any duties?

You must perform some duties to be discharged from bankruptcy, like reporting your monthly household income. In a consumer proposal, there are no duties to carry out.

You must attend two financial counselling sessions regardless of which option you choose.

Choosing between a consumer proposal vs bankruptcy

When it comes to a consumer proposal vs bankruptcy, it depends on your financial situation.

A consumer proposal is a no-brainer if you have assets to protect and a stable income. But bankruptcy might be a better option if you don’t have a regular income, no assets and massive debts.

There are also alternatives, such as debt consolidation and non-profit credit counselling.

To determine the best solution for you, arrange a free consultation with a Licensed Insolvency Trustee.

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