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Consumer Proposal vs Bankruptcy: Choose the Right Debt Resolution Option
- Maha Sultan
- Feb 25
- 6 min read
Updated: 7 days ago
Financial hardships can feel overwhelming, but solutions are available to help you regain control. Two of the most common debt relief options in Canada are consumer proposals and bankruptcy, each offering distinct advantages and considerations. This guide provides a comprehensive comparison to help you understand these options and make an informed decision that aligns with your financial needs and goals.
Table of Contents:
What is a Consumer Proposal?
A consumer proposal is a legally binding agreement between you and your creditors to repay a portion of your unsecured debt over an extended period, typically up to five years. Administered by a Licensed Insolvency Trustee, it allows you to consolidate your debt into a single monthly payment while avoiding the more severe consequences of bankruptcy.
Key Features of a Consumer Proposal
You repay a portion of your debt (typically 30–50%) over a period of up to five years.
Interest stops accumulating once the proposal is filed.
You keep all your assets, including your home and car.
Creditors cannot take legal action against you once the proposal is accepted.
Your credit score receives an R7 rating, which remains for three years after completion.
Who Qualifies for a Consumer Proposal?
You owe between $1,000 and $250,000 in unsecured debt (excluding mortgages).
You have a stable income and can commit to a repayment plan.
You want to avoid bankruptcy while reducing your debt burden.
What is Bankruptcy?
Bankruptcy is a legal process designed to eliminate your debts if you cannot repay them. It involves surrendering certain assets in exchange for relief from most unsecured debts. Like consumer proposals, bankruptcy is also managed by a Licensed Insolvency Trustee, who oversees the process and ensures compliance with the law.
Key Features of Bankruptcy
You eliminate most unsecured debts, including credit cards, payday loans, and tax debt.
The process lasts as little as 9 months for first-time filers with no surplus income.
You receive immediate protection from creditors, stopping collection calls and wage garnishments.
You may need to surrender some non-exempt assets based on Alberta exemption laws.
Your credit score receives an R9 rating, which remains for six years after discharge (or 14 years for a second bankruptcy).
Who Qualifies for Bankruptcy?
You owe at least $1,000 in unsecured debt (but typically, people filing have much higher debt).
You cannot afford to repay your debts through a consumer proposal or other means.
You need immediate financial relief from collections and wage garnishments.
Key Differences between Consumer Proposal and Bankruptcy
Feature | Consumer Proposal | Bankruptcy |
|---|---|---|
Impact On Assets | You keep all your assets, including your home, car, and other valuables, as long as you meet the repayment terms. | You may need to surrender non-exempt assets. However, exemptions vary by province and can include necessities like clothing, furniture, and tools required for work. |
Monthly Payments | Payments are negotiated based on what you can afford. They are fixed and do not fluctuate. | Payments may depend on your income level and are subject to change if your financial situation improves. |
Impact On Credit Rating | A consumer proposal results in a R7 credit rating, which stays on your record for three years after completion. | Bankruptcy results in a R9 credit rating, the lowest possible rating, and remains on your record for 6 to 7 years or more, depending on the circumstances. |
Eligibility | You must owe less than $250,000 in unsecured debt (excluding your mortgage) to qualify. | There is no maximum debt limit for bankruptcy, making it accessible to individuals with overwhelming financial obligations. |
Legal Protection | Both options provide legal protection from creditors, including halting wage garnishments and collection efforts. However, a consumer proposal offers this protection without requiring asset liquidation. | Both options provide legal protection from creditors, including halting wage garnishments and collection efforts. However, a consumer proposal offers this protection without requiring asset liquidation. |
Benefits of a Consumer Proposal
Asset Retention: You can keep your home, car, and other assets (certain limits apply and will be explained by your Trustee).
Lower Credit Impact: The credit rating impact is less severe compared to bankruptcy.
Affordable Payments: Payments are tailored to your financial situation.
No Interest Accrual: Unlike traditional debt repayment, a consumer proposal freezes interest on your debts.
Structured Repayment Plan: Instead of juggling multiple creditors and payments, a consumer proposal consolidates everything into one manageable monthly payment.
Avoids Wage Garnishments: Once a consumer proposal is in place, wage garnishments and collection calls from creditors must stop.
More Control Over Finances: Unlike bankruptcy, where asset liquidation is possible, a consumer proposal allows you to maintain control over your financial future while still addressing your debt concerns.
When is Bankruptcy a Better Option?
While a consumer proposal is often the preferred choice due to its lesser impact on assets and credit, there are situations where bankruptcy might be more suitable. For example, bankruptcy could be the right choice if your income is insufficient to cover even the reduced payments under a consumer proposal or if your total debts exceed $250,000.
Additionally, if you require complete debt relief as quickly as possible, have minimal assets and are willing to accept their liquidation, or have tried a consumer proposal but were unable to maintain the payments, bankruptcy may provide the most practical solution.
Similarities Between Consumer Proposals and Bankruptcy
Both consumer proposals and bankruptcy are administered by Licensed Insolvency Trustees and provide legal protection from creditors. They both aim to help individuals regain financial stability by reducing or eliminating unsecured debts, offering a structured path to financial recovery. While each option has its distinct benefits, they share the common goal of providing debt relief and a fresh start for those struggling with overwhelming financial obligations.
Enhancing Financial Recovery
Regardless of which option you choose, it’s essential to adopt strategies for financial recovery:
Budgeting: Create a realistic budget to manage your expenses and avoid future debt.
Credit Repair: Work on rebuilding your credit by making timely payments and using credit responsibly.
Professional Guidance: Seek advice from a Licensed Insolvency Trustee to navigate your options effectively.
Debt Management Education: Learn strategies for managing finances, reducing expenses, and avoiding unnecessary credit reliance.
Emergency Savings Fund: Establishing an emergency fund can prevent future financial crises and reliance on debt solutions.
Make The Right Choice For You
Deciding between a consumer proposal and bankruptcy depends on your financial situation, goals, and priorities. If retaining your assets and minimizing the impact on your credit score are top concerns, a consumer proposal may be the ideal solution. However, if your debt load is unmanageable and you need immediate relief, bankruptcy might be the more practical option.
Understanding the differences between a consumer proposal and bankruptcy is key to choosing the best path forward. Both options can provide relief and a fresh start, but they cater to different financial needs. Consulting with SCB Debt Solutions ensures you receive personalized guidance and expertise to navigate your options effectively. Our team of Licensed Insolvency Trustees is dedicated to helping you regain financial stability and develop a plan that aligns with your goals.
FAQs
1. How do I decide between a consumer proposal and bankruptcy?
The choice depends on your income, assets, and financial goals. A consumer proposal is ideal if you can afford to repay part of your debt while keeping your assets. Bankruptcy may be a better option if you have no ability to repay and need a clean financial slate. SCB Debt Solutions can assess your situation and guide you to the best option.
2. Will I lose my house or car if I file for bankruptcy?
In Alberta, certain assets and income are protected under the Alberta Civil Enforcements Act. You may be able to keep your home and car, depending on your equity. A consumer proposal ensures you retain all assets.
3. How long will a consumer proposal or bankruptcy stay on my credit report?
Consumer Proposal: 3 years after completion.
Bankruptcy: 6 years after discharge (or 14 years for a second bankruptcy).Both options will impact your credit, but you can start rebuilding it immediately after discharge.
4. What debts are not included in a consumer proposal or bankruptcy?
Certain debts cannot be discharged, including:
Secured debts (e.g., mortgages, car loans)
Child support and alimony payments
Student loans (if less than 7 years old)
Court fines and fraud-related debts
5. How can SCB Debt Solutions help me choose between Bankruptcy and Consumer Proposal?
If you’re struggling with debt, SCB Debt Solutions can help. As Licensed Insolvency Trustees, we provide free consultations to review your finances and recommend the best debt relief option for you. Call us today to take the first step toward financial freedom.