2021 / 02 / 16
If you are struggling with debt and lack resources or income to repay your debt without enduring financial hardship, both a Consumer Proposal and a Bankruptcy are options worth consideration. However, every financial situation is unique so there are situations where a person might be better off with one option over the other. The role of a Licensed Insolvency Trustee (LIT) is to learn about your financial situation, your goals, your future prospects, and present you with all viable options to deal with your debt including the pros and cons of each, to help you make an informed decision about how best to proceed.
Bankruptcy is a legal process designed to relieve you of most, if not all, of your debts provided you complete a series of tasks to obtain a discharge from bankruptcy. Upon discharge, most, if not all, of your debts are essentially wiped out allowing for a fresh start. How much a person pays to go bankrupt and how long their bankruptcy will last is primarily driven by the following factors;
- Income earned while in Bankruptcy (Date of filing to date of discharge)
- Whether there are realizable assets (ex. equity in a house, land, investment, etc.)
- Whether the individual has been bankrupt before
- Conduct of the bankrupt prior to filing
In many cases, a first-time bankruptcy can be completed in as little as 9 months with only the payment of a basic filing fee; whereas in some cases, depending on the factors noted above, a bankruptcy could last much longer and cost significantly more.
A Consumer Proposal is a formal offer made to creditors to repay a percentage of what you owe, over a period of time, not to exceed 60 months, however, there is no minimum time frame. Creditors will vote on the offer and if a simple majority accept, the offer becomes legally binding on all unsecured creditors. A proposal can be paid out in advance and completed as soon as funds are available to satisfy the terms of the proposal.
A Consumer Proposal accepted by creditors will provide an individual with the following benefits that do not apply to an individual filing Bankruptcy:
- Certainty of amount to repay — upon acceptance, the amount to repay to complete the proposal is certain, whereas in Bankruptcy, the amount to repay can vary subject to income fluctuations or other factors while in bankruptcy.
- Keep 100% of future windfalls — inheritance, lottery winnings, or proceeds from the sale of an asset are yours to keep and use at your discretion. In a Bankruptcy, windfalls go to creditors; at least to the extent they are owed.
- Keep all additional income received — additional income received while in a proposal such as pay raises, over-time, bonuses, retro-active pay, new job/second job, or the start of a business are yours to keep and use at your discretion. In a Bankruptcy, all income received while in bankruptcy is compared to guidelines established by the regulator (Industry Canada — Office of the Superintendent of Bankruptcy) which dictates how much income a person needs to cover basic necessities. If income earned while bankrupt exceeds these guidelines, a first-time bankrupt will be subject to a 12-month extension, meaning a 21-month bankruptcy and payment of surplus income for the duration of the 21 months. The more you earn in excess of guidelines, the more you will be required to pay — there is no cap!
- Keep tax refunds for the year of filing — In a proposal, you file your own tax return for the year of filing and keep the tax refund to use at your own discretion provided you did not have balances owed to CRA at the time of filing. In a Bankruptcy, the LIT must file this return on your behalf and refunds, if any, go to your creditors.
- Continue to act as or become director of a corporation — if you have a corporation you wish to continue operating or if you wish to start a corporation, a proposal might be right for you. In a Bankruptcy, you cannot act as a director or become director of a corporation until after you have completed the Bankruptcy (Discharge from Bankruptcy).
- Credit Reports — a first-time bankruptcy remains on your credit report for 6 years after the date of discharge with Equifax; and 7 years from the date of discharge with TransUnion. A Consumer Proposal remains on your credit report for either 3 years from the date of completion or 6 years from the date of initial filing; whichever is the earliest. The sooner you pay off and complete your proposal, the sooner the fact you filed will be dropped from your credit report.
- Continue to be bondable — being bondable means you can satisfy the requirements of your employers insurance policy to protect against the possibility of loss or theft; if applicable. There are many jobs where the ability to be bonded is not an issue. The filing of a Consumer Proposal does not affect ability to be bonded; however, in a bankruptcy, you are not bondable until after you have been discharged.
- Memberships to Professional Organizations — if your job is subject to regulation on behalf of a licensing body (ex. Lawyers, accountants, brokers, etc.) the filing of a bankruptcy may result in restrictions being added to your license or your license being withheld. In these situations, a Consumer Proposal might be the only path forward to allow you to continue earning an income. If in doubt, before filing a Bankruptcy or a Proposal, it is best to seek direction directly from the licensing body and your employer.
In summary, if you feel the benefits of filing a Consumer Proposal may apply to your situation, please do not hesitate to contact our office for more information. However, if you feel the benefits of filing a Consumer Proposal likely do not apply to your situation, please do not hesitate to contact our office to explore all viable options for dealing with debt.
Our goal at Jaime Johnson & Associates Inc., is to not sway your decision one way or another but rather provide you with as much information as possible about all of your options to tackle debt so that you are confident you are making an informed decision about how best to proceed.
Contact us today for a free, no obligation, consultation!