The pros and cons of consumer proposals and bankruptcy
You are probably asking yourself whether a consumer proposal or a bankruptcy makes more sense in your circumstances.
No one wants to go bankrupt. No one.
Consider your assets, your current and expected income, your family needs, and your debts. Make a decision on what you think is best for you then read through our summary of the pros and cons of bankruptcy and consumer proposals.
Whatever you decide, let us know. Email Ken at email@example.com
Consumer Proposals – Pros
- Your proposal will be drafted to ensure (a) your payments will be manageable and (b) your creditors will receive a better return than if you were instead bankrupt, encouraging creditors to accept it.
- The decision whether to accept your consumer proposal is determined by the majority of your unsecured creditors and their decision is forced on any dissenting creditors.
- If creditors initially vote to reject your consumer proposal there is almost always an opportunity for you to agree to their requests by amending your consumer proposal.
- A consumer proposal is a contract. Most require regular monthly payments for 5 years.
- You keep all your assets.
- There is no interest.
- All costs are included in your payment plan.
- With the exception of child and spousal support obligations, your unsecured creditors must stop bothering you.
- You will know exactly what it will cost you and you can pay it off early.
- If you have a credit card with a zero balance you can keep it. But, if the issuer discovers you made a consumer proposal they could decide to cancel it.
- If you are having difficulty making your consumer proposal payments then an amendment of your payment terms might be possible.
- Sometimes a revival process can be pursued if your consumer proposal is deemed to be annulled because of excessive payment arrears.
- When you complete your proposal you will have a fresh start – you will be free from your unsecured debts, except those set out in subsection 178(2) of the Bankruptcy and Insolvency Act – being those from fraud, embezzlement, court fines, many student loans, damages payable if you assaulted anyone, and child and spousal support.
Consumer Proposals – Cons
- Your credit rating will be adversely affected but not to the same extent as a bankruptcy.
- Generally, your payments will be fixed. If you are unable to make your payments and you are three months in arrears then your consumer proposal will be deemed to be annulled, enabling your creditors to pursue you. So, you should only make a consumer proposal if you believe you will be able to make your proposed payments.
Bankruptcy – pros
- Unsecured creditors must stop bothering you because there is a stay of proceedings.
- If and when you receive your discharge you will have a fresh start – you will be free from your unsecured debts, except those set out in subsection 178(2) of the Bankruptcy and Insolvency Act, those being from fraud, embezzlement, court fines, many student loans, damages payable if your assaulted anyone, and child and spousal support.
- The duration of bankruptcy is usually much less than the typical five-year payment term for consumer proposals.
- A bankruptcy usually costs less than a consumer proposal would.
Bankruptcy – cons
- Each month you must complete and give your LIT a report showing how much money you received and how you spent it. Although a very valuable exercise because it builds your financial skills, it is often dreaded.
- You don’t know how much bankruptcy will cost you financially. Often you can have a pretty good idea, however, during your bankruptcy things happen that affect your cost. This is because of (a) the definition of “property” you assign to your LIT when you go bankrupt and that you must deliver to your LIT, (b) your obligation to pay surplus income to your LIT while you are bankrupt, this being an amount calculated from your monthly reports, and (c ) the discharge process which determines whether you must pay further amounts to be released from your debts. So, if your income increases, if you become entitled to receive an inheritance, if you win a lottery, or if your discharge is opposed then your cost will go up.
- You don’t know how long your bankruptcy will be. You are eligible for an automatic discharge from bankruptcy:
- after 9 months if this is your first bankruptcy and, after 7 months, you did not on average have an obligation to pay surplus income. It’s 21 months if on average after 7 months you did have a requirement to pay surplus income.
- after 24 months if this is your second bankruptcy and, after 22 months, you did not on average have an obligation to pay surplus income. It’s 36 months if on average after 22 months you did have a requirement to pay surplus income.
- The amounts you are required to pay monthly on account of surplus income, using the strict formula established by the Superintendent of Bankruptcy in Directive 11R2 are usually unmanageable for persons living in Metro Vancouver. LITs are expected to massage that formula by taking into consideration your personal circumstances however that is a subjective assessment and probably not always applied.
- if you are a sole proprietor then until you are discharged you are required to inform every person you do business with that you are bankrupt.
- You lose any income tax loss-carry-forwards.
- You lose assets that are not exempt from seizure. You can lose your RESP, recent contributions to an RRSP, excess equity in your real property, monies in the bank, cash on hand, jewelry, timeshares, excess equity in motor vehicles, artwork, boats, accounts receivable, shares, investments, tax refunds, etc.
- You must hand over for destruction all your credit cards.
- It is very difficult to obtain any credit while you are bankrupt, except through a cash-secured credit card. Often you are unable to start the credit rebuilding process until after you are discharged.
- Creditors can oppose your discharge and you might have to go to court. This does not occur often.
- Some LITs have been known to charge additional fees because they have opposed your discharge and will go to court to enforce their opposition.
- If you could have made a viable consumer proposal and instead chose to go bankrupt, your LIT is required to oppose your discharge and require you to make additional payments.
- You cannot sponsor anyone for immigration purposes until you are discharged.
- The credit bureau will report a first bankruptcy for the duration of your first bankruptcy plus another 6 years. Multiple bankruptcies are reported for another 14 years.
- Until you are discharged you are restricted from being a director of a BC corporation pursuant to section 124 of the BC Business Corporations Act.