So, you’ve got some debts, and your attempts to solve the problems on your own haven’t worked out. You’re either a renter, or the house you own doesn’t have enough equity in it to refinance and come up with enough money to pay the debt off. Any assets you could sell wouldn’t put much of a dent in your debt, or it would mean torching all of your hard-earned savings that have been tucked away into RRSPs. You don’t have any family or friends who could help you with the debt – there’s way too much of it, and you don’t want to be indebted to a friend and risk ruining what has been a great relationship. And you’ve gone to the bank and asked for a consolidation loan, but have been turned down. Your debt is spread out among several financial institutions and credit card companies, and your bank was not willing to take on the risk that is already tied up with other lenders.
You could avoid paying the debt altogether, but that would mean at least two years of harassment by collection agencies and a possible wage garnishment, and it might be decades before your credit could be repaired. And you’ve run the numbers over and over, and there’s simply no way you can pay the debt back in full. If you’ve exhausted all of these options, there are two viable alternatives left to deal with the debt: filing a bankruptcy and filing a consumer proposal. In almost all cases, filing a consumer proposal is a better idea. Why?? Please read the following nine reasons. The explanation will shed a lot of light on the pros and cons of both options.
- If someone has filed a consumer proposal, they’re not bankrupt. Sounds obvious doesn’t it!! So what’s the big deal about being a bankrupt? Well, for one thing, a bankruptcy carries with it a permanent black mark on your financial history. There is a record that is kept by a federal government department, the Office of the Superintendent of Bankruptcy, that will keep a record of a person’s bankruptcy for the rest of their life. Why does this matter? Turns out if someone has been bankrupt once, and then they get into financial difficulty again later in life, the second bankruptcy will be longer and more expensive, and the credit impact will more than double, from six years after the discharge/release of the first bankruptcy, to 14 years after the discharge of the second bankruptcy. OK, you say, “who goes bankrupt twice?” You’d be surprised – over 20% of the people who file bankruptcy end up in financial difficulty again years later and file for bankruptcy a second time. Equally surprising, the time between the first bankruptcy and the second is just over ten years.
- A proposal requires no monthly reporting of income and expenses. In a bankruptcy, the bankrupt person has to report their income and expenses every month to a bankruptcy trustee, who now are called licensed insolvency trustees (LITs). If the person’s income increases during the period for any reason, such as pay raises, overtime, bonuses, finding a new job with higher pay, or inheritances, the monthly amount that will need to be paid into the bankruptcy may also increase. With a proposal, once someone’s creditors have agreed to a new deal to pay back some of the debt, but usually far less than 100% of it, that’s the deal. If the person’s finances improve for whatever reason, that money is kept by them and neither the creditors nor the trustee are entitled to any of it.
- Generally most proposals are set up to be paid back over five years, and there is no interest whatsoever that is charged during the payment period. Also, there are no penalties for early payment or making extra payments. In a bankruptcy, the income reporting period is fixed, so even if the individual comes into some extra money and wants to make an additional payment to the trustee to wind up their bankruptcy faster, the bankrupt individual will still have to report monthly income and expenses for the full period. Furthermore, if income increases during the period of the bankruptcy, the individual could end up owing the trustee and creditors more because monthly payments to the bankruptcy estate haven’t kept pace with the increase in income. If this happens, the discharge from the bankruptcy will be delayed until the debtor has finished paying everything they owe to the bankruptcy estate, as determined by the trustee.
- Payments in a proposal are generally much lower than in a bankruptcy. Because a first time bankruptcy has to be paid back within 9 or 21 months, depending primarily on the person’s level of income, the payments to the bankruptcy estate can be quite high. With a proposal, although the person will be paying back slightly more to the creditors overall, the 60 month payment period means the monthly payments are generally much lower, often about half the monthly payment in a bankruptcy. The result is monthly cash flow is much improved and the ability to put funds away into a savings account for emergency expenses or even for long-term goals is much greater.
- In a proposal, assets are not lost or forfeited to the trustee on behalf of the creditors. In a bankruptcy, the person’s assets can ‘vest’ with the trustee. In other words, the trustee will have the right to take control of the person’s possessions, such as their house, their vehicles, or their investments and sell or liquidate those items and distribute the money from the sale among the creditors. For example, let’s say there is a vehicle that has $15,000 of available equity in it. In a bankruptcy, the trustee would give the debtor two choices. One choice is to surrender the vehicle and it becomes part of the bankruptcy estate. In this case the trustee would sell the vehicle and distribute the funds to the creditors, after keeping a portion for themselves. The second choice is to buy the asset back from the trustee. For a vehicle with $15,000 in clear value, that might mean paying that amount back over an 18 to 24 month period . . . an extremely costly proposition. In a proposal, the assets a person has must be accounted for; however, they never ‘vest’ with a trustee the way they do in a bankruptcy.
- Both a bankruptcy and a consumer proposal will severely damage a person’s credit rating, but most of us would like to minimize the damage and begin rebuilding credit as quickly as possible. In a bankruptcy, there is effectively no access to credit at all during the bankruptcy period (9 or 21 months for a first time bankruptcy; 24 or 36 months for a subsequent bankruptcy), except for high interest vehicle loans. Following a bankruptcy, it can be difficult to get access to even a secured credit card within a two year period following the discharge of the bankruptcy. In a proposal, secured credit cards and other credit rebuilding tools are available any time after the proposal has received approval from the creditors. Moreover, once the proposal is paid in full, there is a significant boost in a person’s credit score.
- A proposal will be less of an impediment to future employment opportunities than a bankruptcy. More and more employers seem to be doing routine credit checks on job applicants. Additionally, many employers ask their job prospects whether they have been bankrupt in their lifetime. If someone has been bankrupt and they don’t answer this question honestly, they can be eliminated from a recruitment process because they’ve falsified their employment application. Although a proposal can also be a limiting factor on a job application, it’s much less likely to draw attention than a bankruptcy.
- If someone has relatives overseas, filing a bankruptcy may delay them from being able to sponsor family members who wish to immigrate to Canada. Filing a proposal does not usually limit sponsorship.
- Finally, most people feel better filing a consumer proposal. For a lot of folks a bankruptcy feels like the ultimate expression of financial failure. In a proposal, by contrast, at least something is being paid back to the creditors. Many people feel they are doing the right thing by taking responsibility and paying some of what they owe to the creditors. The emotional impact of filing a consumer proposal cannot be underestimated. The ‘black cloud’ of debt that people have been living under, usually for years, is lifted and their outlook on life improves immensely.
As you can tell from the explanation above, there is much to consider when looking at options for dealing with debt.
For help in understanding the differences between a consumer proposal and a bankruptcy, please call our 4 Pillars Kamloops office at 250 434 4505. Bob Hauck would be happy to hear from you and help you find a debt solution that is the best choice for you!
