Making the Choice between a Consumer Proposal and Bankruptcy

There are times when we find ourselves so overburdened by our debt that we simply can’t see any way out of it. It happens to just about all of us at some time in our lives – you are not alone. It doesn’t make you a bad person. It just means you’ve got some hard decisions to make. You might find yourself in this precarious position because of a job loss, because you felt the need to help a family member out, or because you made some dubious financial choices – it doesn’t really matter how you arrived at this point, what matters is how you get yourself out of it.

There are many approaches you can consider, but if you want to get the debt collectors of your back you’ll normally want to choose between a consumer proposal and bankruptcy. You can opt to negotiate with each of your creditors individually, or by using the services of a debt settlement company, but neither of these options will guarantee an end to ceaseless calls from debt collectors.

Bankruptcy

Choosing bankruptcy is an option most people want desperately to avoid. There’s no doubt there’s a stigma attached to it in our society, but there really shouldn’t be. It’s easy to judge someone and assume they’re just bad at managing money, but that’s normally not the reason most people find themselves forced into bankruptcy. It’s more likely a person has to go the bankruptcy route because of a job loss, an illness, or even the death of a spouse.  Whatever the reason you find yourself considering bankruptcy don’t dismiss it out of hand.

What’s the Time Frame?

If you are struggling to pay your debts, and your income is limited, a bankruptcy may be your best option. In Canada, if you’ve never declared bankruptcy before, your bankruptcy will last a minimum of 9 months – it may be considerably longer (up to 21 months) if you have surplus income. You should never rush into a bankruptcy because you will essentially lose all control over your finances. If your income increases during your bankruptcy your minimum payments are likely to go up, and the length of the term of your bankruptcy may very well increase as well. You will not be able to pay the bankruptcy off any quicker than mandated by law.

What Happens to My Assets?

The other thing to consider in a bankruptcy is that you may have to give up all of your assets. If you have a valuable car you may be forced to sell it and opt for a cheaper one. In most cases the need for transportation to and from work will be taken into consideration, but let’s face it, you don’t need a Mercedes to get you to work, you’ll get there just as easily in a Chevy. You may also be forced to sell your house – especially if you have a lot of equity in it.

How will it Affect My Credit Report?

It’s also important to consider what a bankruptcy will do to your credit rating. Equifax will report your credit rating as an R9 while you are in your bankruptcy, and for 6 years after its completion. R9 is the worst credit rating possible, so you’ll find it very difficult to obtain anything on credit for quite some time. On the other hand, if you find yourself considering bankruptcy, chances are your credit rating is already pretty bad.

Consumer Proposal

A consumer proposal is quite different from a bankruptcy. You may want to consider this option if you have a decent income and the prospects are good for this to increase in the future as well, but you’re also sinking under a mountain of debt. Let’s say for example, that you were out of work for 6 months three years ago and during that time you found yourself falling further and further behind on your debts. Fast forward three years, and you’re still struggling with those very same debts. It’s a lot easier to get behind than it is to catch up. This may be the perfect time to consider a consumer proposal. Sometimes you just need to hit the reset button.

What’s the Time Frame?

A consumer proposal will last a maximum of 60 months. It’s certainly a longer time frame than a bankruptcy, but there are many advantages. Once your bankruptcy trustee has negotiated a proposal that is accepted by the majority of your creditors, your monthly payments will be set and they won’t change during the length of your proposal. If your monthly payment is $500 in month 1, it will be $500 in month 60. This means that if you find yourself with a little extra cash, you can actually pay off your proposal quicker. Let’s say you can afford to pay $800 per month, you could complete your proposal in 38 months, or if you come into an inheritance you could pay it all off at once. You can actually control how long the proposal will last.

What Happens to My Assets?

This is a good question. If you own your own home and have quite a lot of equity in it, it will be more difficult to convince your creditors to accept a consumer proposal. If on the other hand, you own your own home but have very little equity in it, there’s a good chance you’ll be able to keep your home as forcing you to sell it won’t be of any advantage to your creditors. The same logic will apply to any vehicles you may own, or other major assets. Any assets you obtain once the proposal has been accepted will not change your term or payments. Once a proposal is accepted any assets you have, or obtain, remain yours to keep.

How will it Affect My Credit Report?

When you’re in a consumer proposal Equifax will report your credit rating as R7 – definitely better than the R9 you’ll get if you opt for bankruptcy. The consumer proposal will continue to be reported on your credit rating up to 3 years after the completion of your proposal – it doesn’t matter whether you complete the proposal in a year or 5 years. In practise, once you’ve completed your proposal payments you have a much better chance of obtaining credit than you do after the completion of a bankruptcy.

The Verdict

So, is it better to choose to relieve your debt burden through a bankruptcy or a consumer proposal? It really depends upon your particular situation, but if you have a good income and the prospect of a raise in the near future you’re almost always better to go with the consumer proposal. Your credit rating is slightly better, and you retain greater control over your financial affairs.

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