Consumer Proposal or Bankruptcy? Which Option to Come Up With?

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When it comes to getting out of debt, things are not all that easy. Consumer proposal and bankruptcy are the two available options to try. Even though both of them provide legal protections from creditors, there’s a catch – one is less damaging than the other. Since bankruptcy translates into losing all your assets, over 51 percent of consumers choose the other way out. The trend to file a consumer proposal is making waves recently. 

Consumer Proposal Definition

First introduced into the Bankruptcy & Insolvency Act Canada, a consumer proposal is a popular way for those in the debt with a large sum to finally be relieved of their burden. It is a legal offer that works to help you keep your assets, which is not an option for bankruptcy.

If you think of bankruptcy as an emotionally attractive option that can give you a fresh start with no debt, you’re wrong. The process is not as simple as you think. So, when picking a consumer proposal vs bankruptcy, the latter needs to be seen as a financial last resort. There is no other way. Remember it.

Difference Between Bankruptcy and Consumer Proposal

If you’re at the point where you are struggling to pay off your bills or make monthly debt payments, both two options are a matter to consider. The good news is that both of these debt relief options offer you the protection of the courts. Whether it’s about harassing phone calls, wage garnishments or interest charges continuing to add up on your debt, forget about it. Your creditors won’t be able to take legal action against you. No other solutions cannot offer the same level of protection.

But what is the hook that differs both options? To make the information clearer to you, the following table would come to your aid.

Bankruptcy

Consumer Proposal

  • Has no debt limits
  • Available for non-mortgage debt up to $250,000
  • Doesn’t require any
  • Affects your assets
  • Keep your assets
  • The process takes usually up to nine months. In some cases, it can last up to two years.
  • It takes typically three to five years to repay your consumer debt proposal.
  • No further payments need to be repaid.
  • Expect to repay some of your debts over three to five years in exchange to keep your assets.
  • Monthly payments remain the same
  • Monthly payments depend on your income

Face it, there is a lot of information to take in. It can be an overwhelming time to learn about all the differences between bankruptcy vs consumer proposal. Still, have questions? No wonder. Here are some common questions consumers ask when considering one of the two options.

What Is Consumer Proposal?

canada consumer proposal
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Think of it as a direct offer you make to all of your unsecured creditors. It works to help you reduce debt. In other words, with this offer, you agree to pay back a portion of your overall debt. Need more benefits? Here are some of them:

  • Reduces overall debt owing;
  • Stops collection action;
  • Stops wage garnishments;
  • You repay with zero interest;
  • Ability to repay quicker with no penalties;
  • Legal protection for a Licensed Insolvency Trustee (LIT).

Yet, just like any other thing in the world, every good thing comes with the consequences. And the main disadvantage of this option is it impacts your credit rating. Moreover, it remains in your credit report for three years from the date it is paid in full. As a result, it can damage your relationship with creditors. However, if you find yourself falling behind on your payments, your credit rating is the last thing to think about.

Put yourself in the creditors’ shoes. Consumer proposal means that the creditors agree to work with you on your payment rules. So, instead of being paid according to the original terms and conditions, they need to accept less than what they are owed. Face it, not what they dream of. So, they are more likely not to do business with you anymore. Nothing personal, just business.

How Does a Consumer Proposal Work?

Despite what you have read before, consumer proposals are easier to navigate and complete. First, meet a LIT so you can understand the process, what’s involved, and fees better. Generally, no court appearances are required and no monthly reporting to the trustee. Once you are a candidate, submit your offer to your creditors. And they will have 45 days to agree to the terms and conditions.

Yet, there’s no guarantee they’ll accept the terms. They have options and are sure to try them. They can accept or decline your offer. Also, they can ask for a meeting to change the rules of the game. Got a denial? No worries, your trustee has the right to amend the initial offer. Once your offer is approved by the majority of the creditors, others have nothing to do but to accept it. Otherwise, you may need to seriously consider declaring bankruptcy. From the moment of approval, you can find yourself on your way to financial recovery.

Does a Consumer Proposal Consolidate My Debt?

consumer proposal vs debt settlement
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Without a doubt, it’s a good way to consolidate your debt into one monthly payment. Better yet, without any interest charges. So, once you file it, you & your creditors agree that your debt (less than the full amount) would be paid over a 5-year period (60 months), or less. One thing to remember here is consistency. If you default (miss 3 payments), your offer would collapse. Filing for another one would be a not available option for you.

Yet, you may ask ‘Will a consumer proposal pay off debt?’ This debt relief option deals with unsecured creditors. Its initial goal is to help you eliminate almost all unsecured debts, including credit card debts, bank loans, payday loans, tax debts, and student loans. The exception here is a mortgage and a secured car loan.

How Do I File for a Consumer Proposal?

If you’re insolvent or your debt amount exceeds your asset amount, you’re a candidate for a proposal. Here some key characteristics of an ideal candidate. File for it, if you one of those who:

  • Can’t get additional financing on the property despite its increase in value;
  • Can be at risk due to bankruptcy;
  • Want to pay fix amount of monthly payments;
  • May lose his assets in the bankruptcy.

In short, anyone in financial difficulty can be a candidate for a consumer credit proposal. So, if you are able to pay a portion of your debts, consider filing a proposal program.

How Long Does Consumer Proposal Stay on Credit Report?

Dream to get the worst rating you can have? Then claim for bankruptcy. An R9 credit rating remains on your report for seven to fourteen years. With a direct offer, you get an R7 rating, which remains on your report for only three to six years. So, whatever debt relief solution you choose, focus on what matters to you most. Your goal is a debt relief but for what price? Either the cost or impact of each option?

Is Consumer Proposal Worth It?

When on the hunt for the best solutions, remember that the right route is not always obvious. Everyone’s financial situation is unique and is a matter to examine. The old saying goes ‘Don’t take diet advice from fat people, don’t take financial advice from broke people’. There are many aspects to take into account, so don’t take the risks and contact a professional who can help you. If done right, the direct offer can help get you out of a whole heap of troubles. So, explore your options available before to move forward.

Consumer Proposal vs. Debt Settlement: The Verdict?

Even though both solutions aim to help you mute the impact of financial troubles, the difference is obvious. Debt settlement works as an option for debt relief, yet, with no guarantee and no protection. Such negotiation services try to settle with your creditors informally. But first, you need to offer a lump sum payment instead. Now think. If you opt for debt relief, are you able to offer that? While the process can take between 12 to 36 months, get ready for escalating your situation. With no legal protection, creditors are more likely to collect the debt.

When you file a consumer proposal, you offer a direct request to each individual creditor. And what matters most, you are protected from the creditors under the Bankruptcy and Insolvency Act. This proposal is a formal offer that can help you pay only a portion of what you owe and potentially eliminate thousands of dollars in interest.

Even now, after reading this, the right route might seem not obvious. And that’s nothing to worry about. First, make a long-term financial plan and then look at all the options you have available. Find experts who can help and analyze the options they will offer you. At last, remember that you have options and even bankruptcy might be the right choice in some cases.

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