Consumer Proposal Versus Bankruptcy – What is the Difference?

What’s the difference between a consumer proposal versus personal bankruptcy? Although both a consumer proposal and bankruptcy are proceedings under the Bankruptcy and Insolvency Act, they differ in the following ways:

Consumer Proposal Versus Bankruptcy – Effect on Assets

In a bankruptcy, your assets would become property of the bankruptcy estate to be liquidated by your Licensed Insolvency Trustee (“LIT”). There are many important exceptions to this general rule depending on the province in which you reside. For example, in Ontario, the following assets wouldn’t be affected:

• • Household furnishings and appliances up to $14,180
  • Your principal residence is exempt from seizure IF the equity in your home does not exceed $10,783. If the equity does exceed $10,783 then your principal residence is subject to seizure and sale
  • All necessary clothing
  • Tools of the trade up to $14,405
  • A vehicle valued up to $7,117
  • Pensions
  • Other special exemptions for farmers
  • Certain life insurance policies and certain registered retirement savings plans and registered retirement income funds

Any asset not in this list would have to be liquidated by the LIT for the benefit of the creditors in your bankruptcy estate.

On the other hand, a consumer proposal doesn’t affect your assets. Therefore, if you’re in financial difficulty but have significant assets you want to protect, a consumer proposal would be an ideal alternative to personal bankruptcy.

Effect on Income

During your bankruptcy, you may be required to pay a portion of your monthly net income to your LIT depending on the level of your income and the number of people you support in your household. Moreover, as your income increases during your bankruptcy, the more you’ll have to pay to your LIT. This is called surplus income.

On the other hand, once your consumer proposal has been accepted by your creditors, you’ll be paying a fixed monthly proposal payment to your LIT. This means that during your proposal, you can earn as much income as you want – so long as you continue making your monthly proposal payment, that extra income is yours to keep.

Effect on Your Credit

If you are first-time bankrupt, a bankruptcy will stay on your record as follows:

Bankruptcy

Generally, both Equifax and TransUnion remove a bankruptcy from your credit report 6 years after the date you’re discharged.

TransUnion removes a bankruptcy from your credit report 7 years after you’re discharged in the following provinces:

New Brunswick
Newfoundland and Labrador
Ontario
Prince Edward Island
Quebec

And if you declare bankruptcy more than once, then the bankruptcies will appear on your credit report for 14 years.

Consumer Proposal

On the other hand, in the case of a consumer proposal:

Equifax removes a consumer proposal from your credit report 3 years after you’ve paid off all of the debts included in the proposal.

TransUnion removes a consumer proposal from your credit report either:

3 years after you’ve paid off all of the debts included in the proposal, or
6 years after you sign the proposal (whichever is sooner)

What this means – the more quickly you pay your consumer proposal in full, the more quickly you can remove a record of your proposal from your credit file. In contrast, if you file bankruptcy, a record of that event  stays on your credit file for a fixed period of time (i.e., 7 or 14 years).

So if you wish to rebuild your credit quickly after dealing with your debts, a consumer proposal will give you a distinct advantage.

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