Financial crisis and debt are not only common, but predominant in today’s society. Paying down debt remains a priority for Canadians and yet, more and more people are finding themselves in situations where they do not have the means to shed the debt® and find financial stability. Though debt reduction is an ongoing goal and, in most circumstances, solvable, people tend to feel helpless and anxious.
When the debt is truly unmanageable, a consumer proposal or bankruptcy may be a wise financial decision. This blog post provides explanations of the options of a consumer proposal and of a bankruptcy, and highlights the advantages and disadvantages of each.
What is a Consumer Proposal?
In brief, a consumer proposal is an offer made by a debtor to creditors to modify the obligation to repay through a negotiated and legally-binding settlement. It is a procedure under the Bankruptcy and Insolvency Act, and is administered by a licensed insolvency trustee. The debtor may propose to pay back a lower amount each month, and possibly a lower total amount, over a period of up to 60 months. The creditors vote to accept or amend the proposal, and negotiations continue until an agreement is reached. As soon as the debtor files a Notice of Consumer Proposal, or a Notice of Intention to make a Proposal, all creditors are stopped from pursuing any legal action against the debtor. Any person whose debt does not exceed $250,000 (excluding mortgage on principal residence) and who is unable to repay their unsecured debt in a reasonable period of time is entitled to make a consumer proposal.
Advantages of a Consumer Proposal
- Provides peace of mind because calls from creditors, wage and bank garnishments, and any other collection actions stop.
- Permits reduction of the total debt you are required to pay.
- Allows a window of up to 60 months to pay off the proposal.
- You retain control of your assets.
- RRSP savings are protected.
- Unsecured creditor(s) will no longer be able to take legal steps to recover any debts, such as seizing assets or garnishing wages, unless the proposal is withdrawn, rejected or annulled.
- Option to increase monthly payments or pay in a lump sum if able to do so.
- Alternative to bankruptcy.
Disadvantages of a Consumer Proposal
- Usually there is an extended period of time (up to maximum of 60 months) before you are discharged of your debt.
- If your debt exceeds $250,000, excluding a mortgage on a principal residence, a consumer proposal is not an option. (Debts over $250,000 may be discharged in a Division I Proposal, or by bankruptcy.)
- The proposal remains on your credit record for three years after the completion of your proposal.
- If you cannot sustain the agreed payments, or you default on payment, and as a result your proposal is annulled, you may then need to declare bankruptcy, which would result in two insolvency proceedings on your credit history.
What is Bankruptcy?
Usually used as a last resort, bankruptcy is a legal process under the Bankruptcy and Insolvency Act which releases you from all your unsecured debts. You assign all your assets (except those exempt by law) to a licensed insolvency trustee who will then realize their value and distribute the proceeds to your creditors. Once you file an assignment in bankruptcy, your unsecured creditors are prevented from pursuing any legal steps to recover debts from you.
Advantages of Bankruptcy
- Relieves all debts with the exception of court-ordered payments such as family support, student loans due within seven years, and liens against property.
- Prevents unsecured creditors from pursuing legal action against you.
- Stops calls from creditors.
- The BIA grants protection for the debtors, including protection of RRSP savings.
- First time bankrupts can be discharged in as soon as nine months, depending on your household income and the quantum of your debts. This enables you to qualify for credit within a shorter period of time (in comparison to a consumer proposal).
Disadvantages of Bankruptcy
- Possibility of losing assets (car, home, investments not in an RRSP, etc.).
- Monthly payments may be higher than in a consumer proposal, depending on your household income.
- Bankruptcy imposes duties on the debtor. You must report monthly income to the licensed insolvency trustee, make all payments as required, attend credit counselling sessions, and provide proof of up-to-date income tax filings and payment.
- If you have not made payments as required, or fulfilled your other duties, your bankruptcy may be extended or even annulled.
- During your bankruptcy you cannot be bonded, which is a condition for certain types of work in Canada, and a condition for sponsoring someone who wants to immigrate to Canada (i.e. sponsoring a nanny or family members).
- Credit will be difficult to obtain for a period of time after declaring bankruptcy.
- The bankruptcy will remain on your credit record for seven years after your discharge.
Filing either a consumer proposal or bankruptcy is not a “one size fits all” solution. Goldhar & Associates will work with you to determine which, if either, is appropriate to resolve your financial crisis.
For a free, no obligation consultation and review of financial situation, talk to Goldhar & Associates. Call us at # (pound) debt (3328) on your mobile phone, or toll-free at 1-855-541-5114. Or use this easy contact form: http://www.shedthedebt.ca/contact. Anywhere in Ontario there is a Goldhar & Associates office near you.