- Debt Relief and Your Assets
- Qualifications and Considerations for Both Options
- Costs of Bankruptcy vs Consumer Proposal
- Effect on Your Credit Score
- Qualifying For Loans and Credit Cards
- Time to Recover Credit
- Owning a Car or Home, and Renting
- Public Records and Employment
- Filing a Consumer Proposal or Bankruptcy
Comparing a Consumer Proposal vs Bankruptcy
Is a Consumer Proposal the Same as a Bankruptcy?
A consumer proposal is not the same as a bankruptcy, but it does impact your credit score for three years after you've completed your payment period. The impact is not as great as it would be if you filed for bankruptcy, however. The fact that you repay a portion of your unsecured debts instead of having them discharged in a bankruptcy is considered more favorable to your creditworthiness.
Is a Consumer Proposal Better than Bankruptcy?
For many debtors, a consumer proposal is a better option than filing for bankruptcy. If you meet the requirements for filing a consumer proposal, which includes having a stable monthly income, it can be better. The costs may be lower than bankruptcy depending on the amount of debt you are carrying.
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The main advantage of a consumer proposal is that it allows you to obtain debt relief without significantly disrupting your life. Valuable assets like motor vehicles and real estate won't be liquidated, and your creditworthiness will recover faster than after a bankruptcy. A consumer proposal will also give you an opportunity to learn more about handling your finances in the future with credit counseling.
How much of my debt is cleared?
Student loans over seven years old
The amount of debt that a consumer proposal will clear depends on several factors. It only applies to unsecured debts, and you'll need enough income to reliably pay back 20-40% of the outstanding balances for a proposal to be accepted. You'll also need to have less than $250,000 in total debt, excluding a mortgage. The types of debt that can be reduced by a consumer proposal include:
Will I lose any assets?
One of the primary differences between a consumer proposal and a bankruptcy is that you aren't required to surrender assets. Bankruptcies have exemptions for certain assets like a single motor vehicle and the home you live in, but additional assets can be liquidated to repay your creditors.
A consumer proposal is a negotiated settlement with your creditors based on your monthly income, not the value of your assets. It may make financial sense to surrender assets like a home if the secured loans attached to them are too expensive, but it isn't required.
Qualifications & Considerations
Not everyone qualifies to file a consumer proposal. In some cases, bankruptcy may be the only option remaining, especially if your monthly income is too low or unstable to support a consumer proposal repayment plan.
How do you qualify for a consumer proposal?
There are six main criteria used to check if you qualify:
You need to be 18 years old.
Excluding a mortgage, your total debt must be less than $250,000.
You must be insolvent, meaning that you cannot repay your current debts given your income and assets.
A Licensed Insolvency Trustee (LIT) must be consulted to determine that you are insolvent and qualify to file a consumer proposal.
You must have enough monthly household income to repay a portion of your unsecured debt.
If you've failed to complete a previous consumer proposal, you won't be eligible to file a new one.
How much debt must you have to file bankruptcy?
You must be classified as insolvent in order to file for Bankruptcy. According to the Bankruptcy and Insolvency Act, an insolvent person is someone whose liabilities to unsecured creditors amount to at least $1,000.00 and are unable to pay those creditors. The rule of thumb, however, is that if you can repay at least 20% of your unsecured debts with monthly payments, then a consumer proposal may be a better option. The more total debt you have, the more difficult this will be.
Can you switch from a consumer proposal to bankruptcy?
It's possible to cancel a consumer proposal and file for bankruptcy if your financial situation changes. There are important consequences for doing this, however. One is that you won't qualify for another consumer proposal in the future after failing to complete your current repayment plan. It's also important to consider all options, such as renegotiating your repayment plan. You can also defer up to two payments during a repayment plan without canceling the proposal. Either of these alternatives will be less damaging to your creditworthiness than a bankruptcy.
How many times can you file a consumer proposal?
If you successfully complete the repayment plan, you'll be eligible to file a new a consumer proposal in the future. If you default on a consumer proposal, however, you won't qualify to file another without reviving it and completing the repayment plan, or fling for Bankruptcy to clear your debts. You can't file for a second consumer proposal while still making payments on current one, either.
Can I file bankruptcy after a consumer proposal?
Yes, you can still qualify to file bankruptcy after completing a consumer proposal if you become insolvent again. Consumer proposals are optional settlement agreements made to avoid bankruptcy, but they don't affect your ability to file bankruptcy in the future.
Another advantage of a consumer proposal is that the costs are lower compared to filing bankruptcy. The trustee collects a statutory fee from your monthly payments.
How much does a consumer proposal cost and who pays?
Unlike a bankruptcy, there are no upfront or additional fees that you must pay to file a consumer proposal. Your Licensed Insolvency Trustee receives a fee set by law that's included in your monthly payments.
How much does it cost to file bankruptcy and who pays?
Bankruptcy vary from case to case. Some costs you can expect to pay include filing fees and legal fees. Your total costs would factor in your income and assets among other things. To better understand the cost of your bankruptcy, is it recommended to speak with a Licensed Insolvency Trustee who can give you a clear picture of your total costs based on your unique financial circumstances.
Effect on Credit
Your credit rating will take a hit and drop to R7 immediately after filing for a consumer proposal because it involves canceling or forgiving a portion of your debts. Depending on your situation and past credit history, it could be less serious than a bankruptcy or about the same.The credit rating will remain at R7 for the duration of the Consumer Proposal, plus three more years.
Does a consumer proposal affect my credit?
Your credit rating will drop to R7 as a result of entering a consumer proposal. It will make obtaining new unsecured debts, such as loans or lines of credit difficult, and you may fail creditworthiness checks for other services.
How long does a consumer proposal or bankruptcy stay on credit?
Generally speaking, a consumer proposal will stay on your credit history for three years after you complete the repayment plan, which means it will remain for a maximum of eight years. A bankruptcy, on the other hand, will remain on your credit file for six or seven years after the first filing or 14 years after a second bankruptcy. The exact length of time will vary depending on each credit reporting agency's policies.
How soon will my credit score improve?
While a consumer proposal will seriously damage your credit rating in the short term, you'll be able to begin rebuilding it again during your repayment period. You can take out small credit lines designed for rebuilding credit to establish a good payment history, which will mitigate the impact of the consumer proposal filing. Credit reporting agencies will gradually reduce the effect of the filing on your score, too.
Loans and Credit Cards
Obtaining unsecured credit or personal loans will be difficult after filing a consumer proposal or a bankruptcy because you'll be considered too much of a credit risk. Secured loans like auto loans or secured credit lines will be available not long after filing.
Can I get a loan or credit card if I file bankruptcy?
It can be difficult, but there are credit-building accounts that you can obtain soon after a bankruptcy. These accounts usually are small credit lines for as little as $150 or as much as $500, and they often require a security deposit. They can have higher borrowing costs as well as high interest rates or annual fees.
Can I get a loan or credit card if I file a consumer proposal?
Unsecured loans and credit lines will be difficult to obtain during your consumer proposal's repayment plan. You can begin to establish a good payment history with a secured credit line, and you may find that loans secured by assets like a car will be easier to obtain. Completing your proposal early will also accelerate your credit rating's recovery and make obtaining new credit lines easier.
Time to Recover
It's a long road back to good credit when you file for a consumer proposal or a bankruptcy, but there are ways to reduce the time it takes to recover. Bankruptcy is more damaging than a consumer proposal because it remains on your public records for as much as 10 years, while a consumer proposal can remain for as little as three years.
How long does a consumer proposal last?
A consumer proposal is a repayment plan that you agree to follow by making fixed monthly payments. The repayment plan cannot be longer than 60 months, but it can be as short as a single payment. Depending on your financial situation, you may be able to choose between different repayment plan lengths. In any case, you can complete a consumer proposal early by making additional payments.
How long will bankruptcy affect me?
Equifax and TransUnion Canada, the agencies responsible for managing the credit worthiness of all Canadians, provide a different answer. Equifax automatically erases a first bankruptcy six years after the discharge date. TransUnion keeps the bankruptcy on your credit report for seven years after the discharge date. For both agencies, a proposal is removed three years after your proposal is complete.. Rebuilding your credit aggressively with new credit accounts can also counteract the impact of a bankruptcy while it's still on your credit reports.
How do I rebuild my credit after a consumer proposal or bankruptcy?
There are several ways to rebuild your credit score after filing for a consumer proposal or even a bankruptcy. It's a long-term process, and your score will remain depressed for as long as the filing appears on your credit report. Credit scores, however, combine many factors including payment history and credit usage. What this means is that opening even a small secured credit line and making monthly payments can improve your credit score.
For consumer proposals, the public record of your filing will expire sooner if you finish your repayment plan early. If you own a home, a second mortgage is one way to do this. By applying the funds from the mortgage to your consumer proposal as a lump sum payment, you can finish it immediately or shorten the payment period dramatically.
Owning a Car or Home and Renting
Home and car ownership can be impacted when you file for bankruptcy, and a debt settlement will damage your ability to secure new financing nearly as much as a bankruptcy will. Over time, however, these difficulties will subside as your credit score recovers.
What will happen to my house or car?
Your primary home exemption in Ontario, only applies if the equity available is under $10,000. If the equity available is over that amount, the Trustee would need to realize it to the benefit of the estate-. For motor vehicles, you can get an exemption to keep one vehicle if its value is less than the current exemption, but you may lose additional vehicles to liquidation. Vehicles that are worth more than the exemption amount will be liquidated.
Consumer proposals don't involve asset liquidations because they represent a settlement between yourself and your creditors. While you might choose to liquidate assets to pay back a portion of your debt, it isn't required. The only thing that's required is that you have a stable monthly income with which to make payments over a period of time.
Can I buy a house or car?
The main effect of either a bankruptcy or a consumer proposal is that your credit score will drop in the short term and slowly recover over time. Initially, you may find it difficult to receive even a secured loan like a mortgage or car loan. If you are approved, the interest rate may be much higher than a typical loan because you're considered a high-risk borrower. As your credit score recovers, though, you'll find that the borrowing terms offered by creditors will improve.
Can I rent an apartment or house?
Rental agreements often involve a credit background check, and a bankruptcy or consumer proposal will raise a red flag. Usually, though, your credit score won't be the only consideration for a rental agreement. Stable employment, sufficient monthly income, and good payment history will play a significant role when owners consider renting to you. If you focus on these other positive factors, you'll be able to rent homes or vehicles after filing a bankruptcy or debt settlement.
Public Records and Employment
Modern employment background checks often include a review of your credit history. As a result, filing for bankruptcy or a consumer proposal may have an impact on your ability to find work, but the effect is not large outside of industries like financial services.
Are consumer proposals public record?
The Office of the Superintendent of Bankruptcy Canada (OSB) is responsible for administering all insolvency records in Canada, and they are public records. Members of the public can access them online using the OSB website, although there is a fee, and searches must be very specific.
The OSB reports monthly to the credit bureaus (Equifax and TransUnion), who record them on their credit histories of individual consumers. These reports include information of new filings and discharge from Bankruptcy files, or Full Performance of Proposals.
How will filing a consumer proposal or bankruptcy affect my ability to get or keep a job?
Employers often include credit history in employment background checks, especially when a position involves handling finances. You may find it difficult to secure certain positions soon after filing because it will be a recent event. Over time, it will become less of a factor. Employers are not allowed to discriminate against candidates based on a bankruptcy record. Government agencies are not allowed to disqualify candidates on the basis of a bankruptcy filing.
Do consumer proposals and bankruptcies show up on background checks?
They will appear on credit history checks, yes. If it includes credit as well as criminal history, a debt settlement filing that hasn't expired from the record will appear in a background check.
How to File a Consumer Proposal or Bankruptcy
A bankruptcy or consumer proposal requires a Licensed Insolvency Trustee to file and administer the process.
Do I need a lawyer to file bankruptcy?
If creditors are likely to dispute debts or you need to protect assets like a home or vehicle, a lawyer will better represent your interests.
Who do I contact for help filing a consumer proposal?
The first step to filing a consumer proposal is to contact a Licensed Insolvency Trustee for a consultation about your financial situation. Not only is it required that an LIT evaluate your qualifications and prepare your consumer proposal filing, but the LIT can help guide you towards other options if a debt settlement is not the best route to take. You can also get a free consultation with a LIT - so speaking to an LIT is your best option for getting help.