Filing a Consumer Proposal While Bankrupt

Category: Consumer Proposal

What happens if you declare bankruptcy in Canada, and then decide you want to file a consumer proposal instead?  Is that possible?

Yes, it is, but first let’s consider why you might want to convert a bankruptcy into a consumer proposal in the first place.

Bankruptcy is often the logical choice if you have no surplus income.  The government has set rules that allow you to earn a certain amount each month.  If you earn over that amount, you are required to make additional surplus income payments while bankrupt.

Working with a trustee you do the calculations and based on what you think you will earn you project that you will not have any surplus income. You decide that bankruptcy is the most affordable debt management option, so you file bankruptcy.

Then, after you file bankruptcy, your income increases.  Perhaps you get a new job, take on an extra part time job, get a raise or start working more overtime.  Now you have surplus income and you are faced with larger bankruptcy payments. Plus because of the bankruptcy rules you know that with surplus income your bankruptcy is extended for an additional year, resulting in even more payments.

What are your options?

You could continue with the bankruptcy and pay whatever is required.  If your bankruptcy is close to finishing that may be the best option.

Or, while bankrupt, you could file a consumer proposal.

Your trustee would work with you to determine what offer will be reasonable to both you and your creditors, based on your new situation, and the proposal would be filed.  If the creditors accept your proposal, you are no longer bankrupt.  If they don’t accept it, you remain bankrupt.

I remember one of the first bankruptcies I filed when I started my firm back in 1999.  It was January, and the man was a bricklayer, and since it was January he had minimal income.  That year we had an early spring, and his income increased very quickly, so he filed a proposal.  The creditors accepted, and he was no longer bankrupt.

When faced with this situation, here is my advice:

First, before filing anything, take your best guess as to what your income will be during the bankruptcy.  If you work in a seasonal industry, like construction, consider what your income will be in a few months.  Your trustee can help you calculate your potential surplus obligations.  If it looks like your income will increase, it may be prudent to file a consumer proposal now, before your income increases.  Of course you must be careful and not base your calculations on a future income increase that may not happen; you don’t want to commit to something you cannot afford.

Second, if you are already bankrupt and are considering a proposal, be sure that you and your trustee do the math.  Even if your bankruptcy is extended for an extra year, that may still be less expensive than a proposal.

In all cases, if your situation changes, keep your trustee informed so they can advise you on your best options.