Should I file for Bankruptcy or a Consumer Proposal?

In my role as Licensed Insolvency Trustee, I get asked this question all the time!

There is no “one size fits all answer”. The answer is, like most things in our industry, “It depends”.

Without getting into all of the details of each option, here is how I typically summarize it.

Most people choose to file a consumer proposal if…

✔️ they have surplus income (above government guidelines) and their payments in a bankruptcy are too high. A proposal may enable them to pay less for longer.

One of the biggest misconceptions around bankruptcy is that your creditors don’t get anything. That is not always true. It depends on various factors, one of them being your level of income Simply stated, bankruptcy will cost a person who has a higher income more than someone with a lower income, in most cases.

This is based on something referred to as the Surplus Income Guidelines, and more formally known in the industry as Directive 11R2

Another misconception is that someone who is declaring bankruptcy cannot afford to pay something back to their creditors. Again, not true. Just because someone is considering declaring bankruptcy, it does not mean they do not have anything, it just means they cannot handle their current financial situation. I have seen payments as low as $25 per month in a bankruptcy and well over $1000 per month.

✔️ they have assets that need to be dealt with in a bankruptcy, in some way, and they want to avoid having to pay for, or surrender, their assets.

When you file a Consumer Proposal, we are, effectively (called) an Administrator of your Estate vs. a Trustee in Bankruptcy. The key word is “Trustee”. In a bankruptcy, certain assets vest in us and we have to do something with them – return them to the debtor, sell them, realize the value on them in some other way. In a Consumer Proposal, the assets do not vest with us and remain with the debtor. Having said that, the value of the assets is taken into account when determining the settlement to be offered to the creditors.

✔️ they have been through bankruptcy previously and they don’t want to file bankruptcy again.

Filing a second bankruptcy can have a much more negative impact on your credit rating than the first one. You are generally in a second bankruptcy longer, and it stays on your credit report for 14 years from your date of discharge (versus 6 for the first time). Filing a Consumer Proposal could be more beneficial from a credit-re-establishment viewpoint in that scenario.

✔️ they have an Incorporated Company and want to remain on as Director.

Under Part II Section 5 (2)(c) of the Canada Business Corporation Act, there are restrictions around being the  Director of an Incorporated Company while in Bankruptcy. These same restrictions do not (at this time) extend to a Director who is in a Consumer Proposal.

✔️ they don’t want their employment to be affected

In some instances, filing for bankruptcy may negatively impact employment. This comes up where employees are bonded and working with money or border services, as an example.

✔️they simply want to avoid having a bankruptcy on their record.

For some, simply having the status of “bankrupt” is reason enough to avoid it. In that case, a Consumer Proposal becomes a more desired option. You certainly do not have to announce to the world that you are in bankruptcy, but it may come up in employment applications, credit applications, security checks and many other instances. It is worth noting here that there is a public record of all bankruptcies that can be checked by any party. Again, this is quite rare unless someone is looking for something specific, but it is possible.

This article summarizes this process nicely: https://www.bankruptcy-canada.ca/bankruptcy-records

✖️ they think that filing a consumer proposal is reflected better on their credit report/score.

I put an ‘x’ on this one because, in most cases, this is not true. This is a pretty big topic which I will designate an entire blog post to, please keep an eye out for that post. 🙂

In summary, there are many reasons why a consumer proposal may be better than a bankruptcy for some. And there are many reasons why a bankruptcy may be better than a proposal for some. At the end of the day, you need to ensure you have all of the information necessary to make the decision that is best for you.

An Insolvency Professional can help you in that process. I can help you in that process. 🙂 Reach out if you have any additional questions or require additional information.

Until my next post…

Wishing you all happy, healthy finances.

Mary Ann
aka Dr Debt

(Licensed Insolvency Trustee, Allan Marshall & Associates Inc.)

Disclaimer: this information is for general purposes only. Every situation is different. If you want to get the best advice possible, you would want to have a personal consultation to receive the advice that is most relevant in your situation.