How Are Bankruptcies Different from Consumer Proposals?

There are two ways for consumers to file for protection under the Bankruptcy and Insolvency Act: a bankruptcy and a consumer proposal.

A bankruptcy is essentially giving up any property that is not exempt under the law in order to pay your creditors. When you file a bankruptcy, you surrender your property to a Licensed Insolvency Trustee. The Trustee sells the property, and the proceeds 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 portion of the debt you owe, and they vote on whether to accept it, which is usually less than the full amount outstanding.

Both a bankruptcy and a consumer proposal are legal proceedings. Both are filed under the Bankruptcy and Insolvency Act, both affect your credit rating, and both can only be completed 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 is the best fit for you. There are two important points to keep in mind:

• In a consumer proposal, you must offer your creditors more than they would receive if you were to go bankrupt.
• If you are able to make a settlement offer through a consumer proposal, you must do so before filing a bankruptcy.

The reason for the second point is straightforward. The legislation requires you to try to repay as much as you reasonably can, while still giving you the opportunity to benefit from the debt relief the process provides.

While bankruptcy and consumer proposals both result in the elimination of excessive debt, they differ in a number of important ways.

Basic Eligibility

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. Your creditors receive more money through a consumer proposal than they would in a bankruptcy, which is why the proposal option must be exhausted first.

If you cannot offer your creditors a reasonable settlement through a consumer proposal, you may file for bankruptcy instead. Your Trustee will advise you on which path applies to your situation.

Other Eligibility Considerations

For consumer debtors, including those who own sole proprietorship businesses, the type of filing 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 your assets exceed $15,000, you file an ordinary assignment. Ordinary bankruptcies are primarily for corporations and are far less common among individual consumers. Most people fall into the summary category.

The $15,000 threshold does not include assets that are exempt from seizure, and it only accounts for the equity in your home or any real estate, calculated as the appraised value less the outstanding mortgage and estimated closing costs in a hypothetical sale.

Example

Suppose you come in for an assessment at Doyle Salewski and declare the following assets. Note that vehicle values below are illustrative; actual black book values change over time and will be verified at the time of your assessment.

• A 2010 KIA Soul with 175,000 km, fully paid off (approximate wholesale value: $3,600)
• A 2015 Dodge Grand Caravan, recently purchased and fully financed
• An RRSP worth $25,000, with $100 monthly contributions
• Household furniture
• Personal effects including jewelry and a wedding ring
• A house solely in your name, appraised at $250,000 with a $230,000 mortgage
• An RESP of $2,500 for your daughter
• A snowmobile valued at $500

At first glance it looks like your assets exceed $15,000, but here is how the exemptions actually work out:

• KIA Soul: You can claim an exemption under the Ontario Execution Act for one motor vehicle. The KIA qualifies, so it is not liquidated. Asset value: $0. Note that only one vehicle is exempt. If you have a second vehicle registered in your name, its value must be included as an asset.
• Dodge Grand Caravan: The vehicle depreciated the moment it was driven off the lot, making the outstanding debt higher than its current value. It holds no value for the Trustee and is not liquidated. Asset value: $0.
• RRSP: RRSPs are exempt under the Bankruptcy and Insolvency Act, with the exception of contributions made in the last twelve months (less taxes). Estimating those contributions at $1,000. Asset value: $1,000.
• Household furniture: Exempt under the Ontario Execution Act. Asset value: $0.
• Jewelry and personal effects: Exempt under the Ontario Execution Act. Asset value: $0.
• House: Only the equity is considered. In this scenario, the approximate equity is $7,500. Under the Ontario Execution Act, equity in your principal residence up to $12,997 is exempt from seizure, so the home is not liquidated. Asset value: $0.
• RESP: Even though the RESP is intended for your daughter, it is registered in your name and is technically your asset. RESPs are not currently exempt under any legislation. Asset value: $2,500.
• Snowmobile: Not exempt from seizure. Asset value: $500.

Final tally: $1,000 for the RRSP, $2,500 for the RESP, and $500 for the snowmobile, for a total of $4,000. This is well under the $15,000 threshold, which means you would file a summary assignment in bankruptcy.

Proposals

Proposals also come in two forms, determined by the amount of your debt rather than the value of your assets. Consumers, including sole proprietorship business owners, who have less than $250,000 in debt (excluding the mortgage on their principal residence) are eligible to file a consumer proposal. Corporations and consumer debtors with more than $250,000 in debt (excluding a primary residence mortgage) file a Division I proposal.

Damage to Your Credit Rating

In a bankruptcy, the impact on your credit rating depends on which credit bureau you check. Canada has two credit bureaus: Equifax and TransUnion. At Equifax, the bankruptcy will be reported for six years following the date of your discharge. At TransUnion, it remains for seven years following discharge.

In a consumer proposal, the impact is the same at both credit bureaus. The proposal will be reported for three years following full completion of the proposal terms. For example, if your consumer proposal sets payments of $250 per month over five years, totalling $15,000, your credit rating will be affected for five years during the proposal, plus three additional years after completion, for a total of eight years.

One advantage of a consumer proposal is that you can pay it off early if your situation allows. If you pay off that same $15,000 proposal in four years rather than five, your credit rating is affected for seven years total rather than eight.

Ownership of Assets

When you file an assignment in bankruptcy, you surrender your property to the Trustee. The Trustee steps into your financial position, and all non-exempt assets become available for sale to repay creditors.

In a consumer proposal, you retain ownership of your property throughout the process. The Trustee still takes your assets into account when determining the terms of the proposal, as the offer to creditors must reflect what they would receive in a bankruptcy scenario.

Surrendering Your Credit Cards

While you are not specifically required by law to surrender your credit cards when filing a consumer proposal, many Trustees will ask you to do so for your own financial protection.

If you file for bankruptcy, surrendering your credit cards is mandatory, with two exceptions:

• If the credit card was issued to a third party, such as your employer or spouse, and the card issuer or that third party has given you permission to use it.
• You may retain 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 creditors. A meeting will be called only if requested by the Official Receiver at the Office of the Superintendent of Bankruptcy, or by creditors who hold at least 25 percent of the value of proven claims.

In a consumer proposal, a meeting of creditors is only called if the creditors reject your offer.

Next Steps

Choosing between a bankruptcy and a consumer proposal depends on your income, assets, and overall financial picture. Book a free, confidential consultation with a Licensed Insolvency Trustee at Doyle Salewski. We serve clients across Ontario and Quebec in English and French.