There are two ways for consumers to file for protection under the Bankruptcy and Insolvency Act legislation: a bankruptcy and a consumer proposal.
A bankruptcy is basically giving up any of your property that isn’t exempt under the law in order to pay your creditors. When you file a bankruptcy, you surrender your property to a licensed insolvency trustee (Trustee). The Trustee will sell the property, and the proceeds (money made from the sale) are returned to your creditors in the form of a dividend payment. The Trustee is paid from the same proceeds.
A consumer proposal is a settlement offer to your creditors. You offer to pay them a certain amount of the debt you owe them, and they vote on whether or not to accept what you’re offering (usually less than what you owe them).
Both a bankruptcy and a consumer proposal are legal proceedings. Both are filings under the Bankruptcy and Insolvency Act, both affect your credit rating, and both can only be done through a Trustee.
When you come in to speak with one of the Administrators at Doyle Salewski, they will assess your financial situation to determine which solution (or perhaps another altogether) is the best for you. It’s important to remember two things:
While bankruptcy and consumer proposals both achieve the same end, getting rid of excessive debt, they are different from each other in a number of ways:
For consumer debtors, including those who own sole proprietorship businesses, the kind of filing you make depends on the amount of debt and the value of your assets. Generally, there are two sizes of bankruptcy and two sizes of proposal.
Bankruptcy: If your assets are valued at less than $15,000, you file a summary assignment in bankruptcy. If you have assets of more than $15,000, you file an ordinary assignment. Ordinary bankruptcies are primarily for corporations and are far less frequently seen filed by consumers. Most people fall into the summary category, with the $15,000 cap determined by a number of factors: it does not include assets that are exempt from seizure, and it only includes the equity in your house (or any real estate)—meaning the appraised value of the house less the mortgage and closing costs in a hypothetical real estate sale.
For example let’s say you come in for an assessment with Doyle Salewski, and you declare these assets:
At first, it looks like you have well over $15,000 worth of assets, but here’s how it actually works out:
Our final tally: $1,000 for the RRSP, $2,500 for the RESP, and $500 for the snowmobile, for a grand total of $4,000. This is well under the $15,000 cut-off, which means that you would file a summary assignment in bankruptcy.
Proposals: Proposals also come in two forms, but they are less complicated and based simply on the amount of your debt. Consumers (again, this includes those of you who own sole proprietorship businesses) who have less than $250,000 worth of debt, excluding the mortgage on their home, are eligible to file a consumer proposal. Corporations and consumer debtors who have more than $250,000 of debt (excluding the mortgage on a primary residence) file a Division I proposal.
In a bankruptcy, the damage to your credit rating depends on which credit bureau you check. There are two credit bureaus in Canada, Equifax and TransUnion. At Equifax, the bankruptcy filing will be reported for six years following the date of your discharge from bankruptcy. At TransUnion, the bankruptcy filing will stay listed for seven years following the date of your discharge.
In a consumer proposal, the damage to your credit rating is the same at both credit bureaus. A consumer proposal will be reported for three years following the full performance of the terms of the proposal (after you finish paying it off). For example, if your consumer proposal states that you’ll pay $250 a month for five years or sixty months ($250 x 60 = $15,000), your credit rating will be affected for five years (duration of the consumer proposal), plus three years following, for a total of 8 years.
One of the good things about consumer proposals, however, is that you can pay them off more quickly if you‘re able to. So if you manage to pay that $15,000 consumer proposal off after four years rather than the five, your credit rating will only be affected for seven years rather than eight (the four years plus the additional three).
When you file an assignment in bankruptcy, you surrender your property to the Trustee. This means the Trustee steps into your financial shoes, and all of the things you own (that can be sold and are not exempt as noted earlier) become accessible to the Trustee to sell.
In a consumer proposal, you are not surrendering your property, so you keep what’s yours. The Trustee still takes your property into account when determining the terms of a consumer proposal, however.
While you are not specifically required by law to surrender your credit cards when you file a consumer proposal, many Trustees will have you do so anyway, for your own protection.
If you file for bankruptcy, you will have no choice and must surrender any credit cards to the Trustee, with two exceptions:
If you have a credit card that was issued to a third party, for example your employer or spouse, and the credit card company or the third party has given you permission to use itYou can maintain a secured credit card as long as the terms of the agreement are met.
In a summary assignment bankruptcy there is no automatic requirement for a meeting with your creditors. A meeting will be called if requested by the Official Receiver at the Office of the Superintendent of Bankruptcy, or by creditors who hold at least 25 percent in value of proven claims. A meeting of creditors is only called in a consumer proposal when the creditors reject your offer.