Consumer proposal vs bankruptcy

Find out the differences between a consumer proposal and bankruptcy so that you can pick the best debt solution for you.

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If you’re struggling to pay off the money you owe, you might be considering a number of debt solutions. If you’re at the end of the line, the two options that might make the most sense to resolve your debt include a consumer proposal or bankruptcy.

Bankruptcy is usually a last resort option since it requires you to forfeit your assets to pay off your debt. A consumer proposal is a viable alternative to bankruptcy because it forgives a portion of your debt, but you won’t have to forfeit your home or vehicle to make your payments.

Keep reading to learn more about entering a consumer proposal vs bankruptcy, and use this information to decide which option is the best fit for you.

Compare credit builder loans as an alternative to bankruptcy

Name Product Interest Rate Max. Loan Amount Loan Term Fees Min. Credit Score
Marble Fast-Track Loan
18.99% – 24.99%
$15,000
36-84 months
Legal and admin fees of $295 - $1,500 (based on size of loan)
300
Marble Financial offer credit builder loans in amounts from $2,500 to $15,000. Improve your financial health within 36 months. This loan is strictly for borrowers exiting a consumer proposal.
Refresh Financial Credit Builder Loan
19.99%
$25,000
3-5 years
No administration or origination fees.
300
No funds are provided by Refresh upfront. Instead, funds are placed into a secured account to be accessed later. Your payments are reported to the credit bureaus, potentially impacting your credit score.
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What is a consumer proposal?

A consumer proposal is a legally binding agreement that you can enter into with your creditors to make your debt more manageable. This agreement is designed to forgive a portion of your debt and to help you set a payment schedule that fits your budget. Once your proposal is accepted, your creditors will also be required to cease all forms of debt collection including wage garnishment, late fees, interest charges and legal action.

As soon as you’re approved for your consumer proposal, you’ll make interest-free payments on the amount you’ve negotiated with your creditors. Your credit score will also drop immediately and will stay low for the entire time it takes you to pay your consumer proposal back. It will also be negatively affected for three years after you pay it off. You’ll need to work hard to get your credit score back up to normal after this “waiting period” has passed.

What is a consumer proposal?

What is bankruptcy?

Bankruptcy is a legal process initiated by a legal “trustee” that allows you to eliminate most (if not all) of your debt. In return, you may have to forfeit certain assets like your home or vehicle to pay back what you owe. The assets you’ll have to give up will depend on how much money you need to repay and what province you live in. Each province has its own guidelines governing which assets you can keep and which ones you have to give up.

Once you’ve handed over your assets, your trustee will sell them off to pay back your creditors. You’ll also typically need to pay a minimum contribution towards your bankruptcy in addition to an income surplus (which will vary depending on how much you earn). Your credit score will also drop down to the lowest score possible, and it will stay as a blight on your credit report for 7-10 years, depending on what type of bankruptcy you file for.

Consumer proposal vs bankruptcy

There are a number of differences and some similarities between filing a consumer proposal and declaring bankruptcy. The number one difference is that a consumer proposal lets you retain all of your assets while bankruptcy requires you to forfeit your assets (including your home and vehicle) to pay back your debt.

A consumer proposal also has less of an impact on your credit score and will stay on your credit report for less time than a bankruptcy.

Feature

Consumer proposal

Bankruptcy

Allows you to retain your assets

YesNo

Forgives some (or all) of your debt

YesYes

Charges interest on the amount you owe

NoNo

Stops debt collection from creditors

YesYes

Can be cancelled if you miss payments

YesNo

Monthly payments are required

YesNot usually

Brings your credit score down

Yes (to an R7 or an R9)

Yes (to an R9)

Stays on your credit report

Yes (for up to 3 years)

Yes (for 7-10 years)

Which debt solution is cheaper? Consumer proposal vs bankruptcy

The debt solution that’s cheapest for you will depend on how much money you earn and whether you own any assets. If you don’t own your own home, have an inexpensive vehicle and earn an average income, you’ll usually save money by filing for bankruptcy over a consumer proposal since this will usually completely wipe out your debts. That said, doing so will drop your credit score down to the lowest score possible.

If you want to protect your credit score or you have a ton of assets that you don’t want to lose, you’ll probably benefit more from a consumer proposal. This will typically require you to make repayments on your debt over the course of five years. The bonus with this type of agreement is that you won’t have to pay any more than what’s agreed upon in your original contract, even if you receive a lump sum of cash (like an inheritance) or your income goes up.

What are the long-term consequences of both debt solutions?

Both consumer proposals and bankruptcy come with similar long-term consequences. These should be carefully considered before you decide whether either option is the right fit for you.

  • You’ll have a permanent public record. Since both bankruptcy and consumer proposals go through the courts, you’ll have a permanent public record as soon as you file that can be accessed through a searchable online database.
  • You won’t be able to qualify for financing. It will be really difficult for you to access a mortgage or other types of loans. You may also be barred from signing up for an unsecured credit card due to your low credit score.
  • You’ll have to rebuild your credit score. It can take a long time and a lot of work to rebuild your credit score after you file for a consumer proposal or bankruptcy. You’ll also have bad credit for many years following both debt solutions. Don’t know your credit score? Find out here.
  • You could struggle to qualify for employment. You might have fewer prospects for employment if you go with a debt solution that brings your credit score down. This is especially true if you work in finance, banking, law enforcement or the public service.
  • You may not be able to find rental housing. You could have difficulty finding rental housing since many landlords have started to check credit scores as a means of finding reliable and financially responsible tenants.

What are some other debt solutions?

If you don’t think a consumer proposal or bankruptcy is the right fit for you, you might like to check out some of the following debt solutions:

  • Debt settlement. This will let you work directly with a debt settlement company to bring down the amount of money you owe without significant damage to your credit score.
  • Debt consolidation loan. You’ll be able to use this type of loan to consolidate all of your debts in one easy-to-manage payment.
  • Credit counselling. Many cities offer not-for-profit credit counselling services to help you explore your payment options and develop a plan to tackle your debt.
  • Borrowing from loved ones. You may be able to ask your family or friends for an interest-free loan if you don’t owe very much.

Bottom line

Whether a consumer proposal or bankruptcy is the right solution to help you get out of debt will depend on your unique financial situation. While both options can provide suitable debt relief for some people, they won’t work for everyone. Compare the similarities and differences between consumer proposals and bankruptcy to learn which option might be the best fit for your unique set of needs.

Frequently asked questions: Consumer proposal vs bankruptcy

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