The Difference Between A Consumer Proposal and Bankruptcy

The Canadian government provides an official, legal arrangement for people in debt difficulty to negotiate with their creditors to repay debt on different terms that those they originally entered into.

This device, called a Consumer Proposal, is different from bankruptcy, and gives the debtor some significant advantages over bankruptcy or paying the debt back over the full terms of the loans.

The advantages to the consumer with a Consumer Proposal are that:

1. The interest rates on all debt are frozen.

2. The consumer is able to negotiate to repay a portion of what (s)he owes, if the creditor agrees.

3. Creditors are unable to take legal action against you, and the credit bureaus stop calling.

4. Any wage garnishments in place, except those for child support or alimony, are ended immediately.

5. A majority of your creditors must agree to your proposal or it is void. However, if a majority (over 50%) agrees, then all creditors are considered to have accepted.

6. The maximum time period for paying the debt is 5 years.

7. The credit ranking for a consumer proposal is slightly better than that of bankruptcy.

With a consumer proposal, the debt is not eliminated, but is nearly always reduced. The creditor agrees to make payments of a certain amount each month for a specified length of time.

With bankruptcy, the debtor is determined to be insolvent; in other words, owes at least $1,000 and is unable to make payments when they are due.

In the case of bankruptcy, there are limits on the value of personal belongings, household goods, tools for work, farm tools and vehicles that a person in bankruptcy is allowed to keep. If the value of any of these items exceeds the moderate limits set by statute, then the debtor is required to liquidate them and divide the money between the creditors.

Additionally, a bankruptcy involving assets over $10,000 are reported in the newspaper and the mark stays on the creditor’s credit report for seven years.

However, creditors do stop calling, and the debtors are allowed to keep all wages after the filing, allowing them to make a new start.

If the debtor has the ability to make payments under a consumer proposal, it is often a better choice, since creditors can oppose a bankruptcy discharge if a debtor had the means for a consumer proposal and chose not to utilize it.

The affect on the credit score of the debtor is also lower with a consumer proposal.