Bankruptcy vs. Consumer Proposal
How are Bankruptcies Different from Consumer Proposals?
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:
- In a consumer proposal, you must offer more to your creditors than they would receive if you were to go bankrupt; and
- If you are able to offer your creditors a settlement under a consumer proposal, you must do so before you file a bankruptcy.
The reason for the latter point is simple. You’re required to try to pay back as much as you can, within reason, while still being given the opportunity to benefit from the rehabilitation (relief from your debts) the legislation provides.
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:
- In order to file either a bankruptcy or a consumer proposal, you must be (unable to pay your debts as they become due).
- By law, if you are financially able to do so, you must offer your creditors a settlement through a consumer proposal before you are considered eligible to file a bankruptcy (remember, your creditors get more money in a consumer proposal than they would in a bankruptcy).
- If you cannot offer your creditors a reasonable settlement through a consumer proposal, you may file instead for bankruptcy. Your Trustee will be able to advise you on this.
Other eligibility considerations:
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:
- A 2010 KIA Soul with 175,000 km on it (worth $3,600 black book value wholesale) that’s completely paid off
- A 2015 Dodge Grand Caravan that you just bought and fully financed
- An RRSP worth $25,000 to which you contribute $100 per month
- Household furniture
- Some jewelry, wedding ring, etc.
- A house owned solely by you with an appraised value of $250,000 and a mortgage of $230,000
- An RESP of $2,500 (your contribution) for your daughter
- An old snowmobile valued at $500
At first, it looks like you have well over $15,000 worth of assets, but here’s how it actually works out:
- You can claim an exemption from seizure for the KIA under the provincial legislation called the Ontario Executions Act, so it is not liquidated (i.e. you keep it). Asset value: $0
- The Dodge Grand Caravan decreased in value as soon as you drove it off the lot, making the debt on it higher than its value. Essentially, it has no value to the Trustee (no one would benefit from its sale), so it is not liquidated. Asset value: $0
- The RRSP is exempt from seizure under the legislation of the Bankruptcy and Insolvency Act, except for the last twelve months’ worth of contributions (less taxes). We’ll estimate the value of those contributions at $1,000 to keep our numbers round. Asset value: $1,000
- You can claim an exemption from seizure for the household furniture under the Ontario Executions Act, so it is not liquidated. Asset value: $0
- You can also claim an exemption from seizure for personal effects such as jewelry under the Ontario Executions Act, so it is not liquidated. Asset value: $0
- Only the equity in the house is taken into account. According to our calculations, the approximate equity in this situation is $7,500. Because you can claim an exemption from seizure for equity of up to $10,000 in your real estate (home) under the Ontario Executions Act, it is not liquidated. Asset value: $0
- Even though the RESP is for your daughter, it’s in your name and is technically yours. RESPs are not currently exempt from seizure under any legislation, so its full amount is applied. Asset value: $2,500
- The snowmobile is not exempt from seizure. Asset value: $500
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.
Damage to your credit rating
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).
Ownership of assets
When you file an assignment in bankruptcy, you surrender your property to the bankruptcy 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.
Surrendering your credit cards
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 it
- You can maintain a secured credit card as long as the terms of the agreement are met.
Meetings of creditors
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.