Filing a consumer proposal or bankruptcy will deal with your debts. Both procedures were created by federal bankruptcy law, and are legally binding on your creditors, so once your consumer proposal or bankruptcy is completed the creditors cannot pursue you for those debts.
Both solutions deal with your debts, but there are some differences.
Difference between consumer proposal and bankruptcy
Payments
First, with a consumer proposal your consumer proposal administrator works with you and your creditors to negotiate a repayment plan up front. Once the proposal is accepted, you know exactly what you are required to pay.
In a bankruptcy the amount you are required to pay each month may vary with your income. If you have surplus income the amount you are required to pay increases. That can result in a significant cost difference between a consumer proposal and a bankruptcy.
If you get a raise at work, or work overtime, or get a bonus, the amount you pay in a bankruptcy may increase. In a consumer proposal, your payment is fixed. Even if you work lots of overtime and get a large bonus, your payments do not increase in a proposal.
How Long It Will Last
Second, a bankruptcy lasts for a pre-determined minimum length of time. How long you will be bankrupt follows a set of legislated bankruptcy rules. In a first bankruptcy with no surplus income you are bankrupt for a minimum of nine months. If you have surplus income you are bankrupt for a minimum of 21 months, and a second bankruptcy with surplus income lasts for at least three years.
In a consumer proposal you are paying a set amount, so if you pay it faster, the proposal ends sooner. For example, your creditors may accept a proposal where you offer to pay $200 per month for 60 months for a total of $12,000. If your income increases and you can afford to pay $600 per month, your proposal is done in 20 months. If you receive a lump sum of money, like a tax refund, and decide to apply that to your proposal, you can be done even quicker.
That’s a big difference between a consumer proposal versus a bankruptcy: you have the ability to pay off the proposal quicker, and begin rebuilding your credit much sooner.
Your Credit Report
Another difference is that Equifax, Canada’s largest credit reporting agency, reports your bankruptcy as an R9 (the worst possible rating). How long your bankruptcy remains on your credit report depends on your situation. Usually bankruptcy remains on your credit report for six years after you are discharged. If you had a 21 month bankruptcy, the bankruptcy remains on your credit report for almost eight years.
Equifax reports a consumer proposal as an R7 (slightly better than a bankruptcy), and it remains for three years after you complete your payments. So, if you pay your proposal in full in two years, the note disappears from your credit report in five years, which is significantly better than a bankruptcy.
It’s important to consult a licensed bankruptcy trustee and consumer proposal administrator to review the differences between a consumer proposal and bankruptcy and determine which option is best for you and your family.