Bankruptcy or consumer proposal: what really makes the difference

When debts exceed what you can repay, two terms come up again and again: bankruptcy and consumer proposal. They are sometimes presented as two versions of the same thing, one “softer” than the other. It is more nuanced than that. They are two different mechanisms, with different effects on your property, your budget and how long the process lasts.

The same starting point: the trustee

Both bankruptcy and a consumer proposal are administered by a licensed insolvency trustee. The trustee reviews the financial situation, prepares the documents and deals with the creditors. Neither process is something you file on your own.

The proposal: an offer to creditors

A consumer proposal is a settlement offer. You propose to repay your creditors part of what you owe, on terms set with the trustee. It is available when total debts do not exceed $250,000, not counting, among other things, the mortgage on your principal residence, and it cannot last more than five years.

Creditors have a say. The proposal is accepted if creditors holding more than half of the value of the claims vote in favour. It is also deemed accepted if no meeting of creditors is requested within 45 days.

Its main appeal: the person generally keeps their property, provided they keep paying their secured creditors, such as the mortgage lender.

Bankruptcy: a fresh start, on certain conditions

Bankruptcy works differently. It aims to release the person from their debts after a set period. For a first bankruptcy, when the other conditions are met, the discharge is automatic after nine months if the person has no surplus income to pay, and after 21 months if they do.

Property is handled differently: some assets are protected by law, but others may have to be surrendered to the trustee. That point, more than the amount of debt, often drives the choice.

What stops, and what is not erased

As soon as a consumer proposal is filed, the person stops paying their unsecured creditors directly, and wage garnishments and lawsuits brought by those creditors are stayed. That is often an immediate relief.

On the other hand, some debts survive bankruptcy. They include support payments owed to a spouse or children, fines imposed by a court, debts arising from fraud, and student loans when fewer than seven years have passed since the person stopped studying. It is better to know this before choosing.

Where does a lawyer fit in?

The trustee administers the file. A lawyer steps in when the situation goes beyond the financial framework: a lawsuit already under way, a contested seizure, a creditor claiming its debt will not be released, a debt tied to a family dispute. In those cases, it is wise to have the legal question reviewed before committing.

For the basic rules, see also our practical guide on debt, bankruptcy and consumer proposals.

Sultan Avocat Inc.

This text provides general information and is not legal advice. The choice between bankruptcy and a consumer proposal depends on your specific financial and legal situation.