Bankruptcy has serious consequences on an individual’s financial standing, which is why many Canadian debtors consider switching from bankruptcy to a consumer proposal instead. It is well known that a consumer proposal has less of an impact on your credit than bankruptcy, but is switching to a consumer proposal possible? In this article, we’ll explore the reasons to switch as well as important considerations before doing so. Moreover, you’ll learn how switching from bankruptcy to a consumer proposal works and whether it’s applicable to your financial situation.
What Happens After Switching From Bankruptcy to Consumer Proposal?
If you switch from a bankruptcy settlement to a consumer proposal, your bankruptcy will be annulled as soon as your consumer proposal is approved by the court.
Keep in mind that the court approval date is not the same day as the creditor acceptance date. The court approval date happens shortly after your proposal is officially accepted by creditors.
Key Reasons to Switch to a Consumer Proposal
There are several reasons to switch from bankruptcy to a consumer proposal in Canada:
- A consumer proposal allows you to keep all your assets, while a bankruptcy will require you to surrender non-exempt assets.
- A consumer proposal doesn’t require any reporting. Bankruptcy requires you to report your budget and income on a monthly basis.
- In bankruptcy, your monthly payments will rise if your income increases. Your repayment plan will remain the same under a consumer proposal and your creditors will not know if your income changes.
- Bankruptcy has a more dramatic effect on your credit score than a consumer proposal.
Specifically, a consumer proposal has an R7 rating and remains on your credit report for 3-6 years depending on when you repay the debt. Bankruptcy has an R9 rating which remains for at least 6-7 years after completion. In summary, bankruptcy has a bigger impact and much longer duration. Consumer proposals have a slightly smaller impact and can potentially come off your credit report much quicker.
Guidelines for Switching to a Consumer Proposal in Canada
There’s a few aspects to consider and guidelines to follow before you can switch from bankruptcy to a consumer proposal. Reach out to 4 Pillars to learn what challenges apply to your situation. Here’s some common guidelines to keep in mind before trying to switch to a consumer proposal:
- Unsecured Debt Balance must be Under $250,000: $250,000 is the maximum amount of unsecured debt you can have when filing for a consumer proposal. This total does not include debts like mortgages or car loans. If your unsecured debt is above $250,000, you are not eligible for a consumer proposal.
- Post-Bankruptcy Debts Can’t be Added: Any debts accumulated after you filed for bankruptcy cannot be included as part of your consumer proposal. Keep this in mind if you’ve faced significant debts since filing for bankruptcy. Meet with a 4 Pillars consultant to explore other options if this applies to you.
- Proposal Repayment Amount Must Exceed Bankruptcy Repayment Amount: Unless a lower offer is justified, the amount your creditors receive in a consumer proposal must be larger than what they would receive during your bankruptcy. If not, it is unlikely that creditors will accept your proposal.
How to Switch from Bankruptcy to Consumer Proposal in Canada
To start the switch, all you need to do is start the consumer proposal filing process. Your bankruptcy will be annulled automatically once the proposal is accepted by the court.
Reach out to 4 Pillars: Debt Consolidation Experts!
Meet with a 4 Pillars consultant to discuss your options and find out if a consumer proposal is right for you. We offer a free, no-judgement review of your financial situation in order to determine the best course of action in resolving your debt. As an unbiased party, we help Canadians by finding them a debt resolution that benefits them, not their creditors.
By reaching out to us, we’ll be able to guide you through the consumer proposal process and inform you about any potential challenges you may face. Our goal is to inform clients about their debt situation and rights, ensuring they aren’t taken advantage of or misled. We leave the decision-making power in your hands, but we help your decision-making by presenting and thoroughly explaining all the available resolution options.
Frequently Asked Questions about Switching to a Consumer Proposal
How much debt is forgiven in a consumer proposal?
In the best case scenario, up to 80% of your debt can be forgiven under a consumer proposal. On average, the range ends up somewhere between 20%-50% of your total balance, but can be higher or lower in certain cases.
The amount depends on how much you can realistically pay back. For example, if you’re in a very difficult financial situation, your LIT could negotiate to have a higher amount of the debt forgiven.
What is the success rate of a consumer proposal?
In our experience, consumer proposals are accepted at least 97% of the time, either on the first-try or after re-negotiation of the proposal terms. They are very rarely rejected.
Why would a consumer proposal be denied?
A consumer proposal is denied when creditors consider the repayment offer too unreasonable. You can refile with a better offer that more accurately reflects the creditors’ expectations. Your LIT will work with you to come up with a more reasonable proposal.
