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Bankruptcy vs Consumer Proposal – Which is Right For You?

January 12, 2018

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Over the past few years, we have seen a significant increase in the number of consumer proposals by British Columbians seeking debt relief options. According to the Office of the Superintendent of Bankruptcy, 55% of BC’s insolvency filings in 2016 were consumer proposals.

A consumer proposal is a formal, legally binding process that is administered by a Licensed Insolvency Trustee (LIT). The LIT will work with you to develop an offer to pay creditors a portion of what is owed to them and can extend the time you have to pay off the proposal to make your monthly payments manageable.

In our experience, consumer proposals are usually most effective for individuals who have a relatively stable income, owe less than $250,000 (not including their residential mortgage) and are looking for an alternative to bankruptcy.

When considering a consumer proposal, it must not only be viable, but should also provide a greater return to your creditors than a bankruptcy would. A consumer proposal requires acceptance from at least 51% (based on $ value) of your creditors in order for it to be legally binding.

Once your consumer proposal is accepted by your creditors, your only obligations are to make the required payments and attend two financial counselling sessions. You are not required to submit monthly income and expense reports and you may retain your assets and tax refunds. With a consumer proposal there is a lesser impact on your credit rating and your future ability to obtain credit compared to a bankruptcy. The credit bureaus report a consumer proposal as an R7 rating and it will remain on your credit report for three years after completion, which gives debtors plenty of incentive to pay it off early.

There are no additional fees or interest with a consumer proposal and your terms can be structured as fixed monthly payments or as one lump-sum payment. A consumer proposal also gives you the freedom and flexibility to earn more money, sell your assets at your own discretion and pay the balance off early, allowing for a quicker recovery period.

You may also continue to act as the director of a corporation and maintain professional accreditation that may be lost or put at risk by a bankruptcy.

When a consumer proposal is not possible, personal bankruptcy may be the best solution, but it’s important to understand the differences between the two.

Bankruptcy is a formal process where debtors who cannot meet their debt-repayment obligations can obtain a fresh financial start by extinguishing their unsecured debts in as little as nine months.

Once you have filed for bankruptcy, you are obligated to file monthly income and expense reports, make monthly payments (determined by your income) to the LIT and attend two financial counselling sessions. Any tax refunds for the year of bankruptcy and the unfiled years prior must be sent to the LIT as they are considered an asset of the bankruptcy estate. The credit bureau notes an R9 rating on your credit report for six years after you have been discharged from your first bankruptcy.

If you are the director of a corporation and you choose to file for bankruptcy, you must resign as director. Additionally, a bankruptcy may affect your ability to obtain or maintain any professional designation or licensing.

While the thought of filing for bankruptcy may seem scary, the idea behind it is to permit an honest person in an unfortunate situation the option to eliminate their debts and focus on building a bright financial future.

If you or someone you know is struggling financially, it’s important to ask for help. Our team of licensed professionals will work with you to evaluate your financial situation and discuss how each option will affect you, your payment requirements and other obligations. Allow us to make recommendations to develop successful strategies for achieving financial goals and overcoming setbacks.

Contact us today for your free, no-obligation consultation and get on the road to financial freedom.

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