You’ve reached the end of your rope. You’ve got collectors calling you and no idea where you’re going to get the money to pay them back. So what do you do? For many, the first (and most terrifying) thought is filing for bankruptcy, but that’s far from the only option. A less talked about alternative is entering a consumer proposal (one step above the severity of bankruptcy on the financial ladder).
In order to decide which option makes more sense for you, we’ve broken down both the pros and cons of bankruptcy and consumer proposal so you can educate yourself on the basics before making a decision.
What is bankruptcy and how does it work?
Bankruptcy is an ongoing process that can last anywhere from 9 to 21 months. In order to qualify, you must owe a minimum debt of $1000.00. It’s important to note that your bankruptcy will stay on file for six or seven years from the date of discharge (depending on your province).
While bankruptcy is meant to alleviate the burden of debt for those who are absolutely unable to pay it off, the process, unfortunately, is not completely free of charge. Those filing for bankruptcy will have to hire a trustee (a certified debt management professional) to take on their case. They are typically paid using money that results after the liquidation of your assets (with fees coming to approximately $1500.00). If you’re unable to find a trustee who will accept your file, or if you can’t afford to pay for one, then there are programs like the OSB’s Bankruptcy assistance Program that might be able to help.
If you choose to file for bankruptcy, you must also attend paid counselling sessions and meetings with your trustee to make pre-agreed upon debt payments, and in the case that you do not have any assets to liquidate, your trustee will charge you an overtime fee every month.
The idea of filing for bankruptcy terrifies many people who are drowning in debt because they operate under the (mistaken) belief that all of their assets will be taken and liquidated, leaving them with nothing. While it’s true that some of your possessions may be seized, the aim of bankruptcy is not to pillage and plunder away everything you own. There are exemptions on what can be seized based on province, and at the very least, you will be left with the basic essentials you need to live. Whether or not your car or home will be taken works on a case by case basis, and often varies province by province.
In addition to immediately making the calls from collectors stop, filing for bankruptcy protects you from other forms of collection action like the dreaded and humiliating wage garnishment (in which collectors call your place of employment and ask your employer to set aside a portion of your wages to be paid directly to them). Bankruptcy also eliminates any of your unsecured debts, is much faster than other options for getting the collectors off your back, and is also relatively inexpensive (comparatively).
While it’s true that it can do a number on your credit score, the people filing for bankruptcy in the first place tend to already have horrible credit so it’s not much of a drop. Bankruptcy can be a saving grace in the long run because it eliminates debt so you’re free to start building your credit again from scratch.
As was touched on, one of the major cons of bankruptcy is its effect on your credit history. It essentially resets your credit history to zero once the process is complete (which for some is a blessing in disguise). And yes, depending on your situation, you may have to give up some of your assets to your trustee (who will liquidate them in order to start paying back some of your debts and keep a percentage as part of their own income). Filing for bankruptcy also requires you to keep track of all your expenses and income with detailed records.
There’s also a chance you might have to make surplus income payments (in which a portion of your earnings are required to be turned over to your trustee who will distribute them among the creditors).
A final concern a lot of people who are considering filing for bankruptcy have is that other people will know. The good news is that while you will be listed on public bankruptcy records, almost no one ever checks them so the chances of being found out are incredibly slim.
What is a proposal and how does it work?
Entering into a consumer proposal is the ideal step before bankruptcy. The best candidates are those who have debts over $5,000 but not over $250,000 (not including your mortgage), have a good job and are able to swing at least some payments each month (though can’t afford to make full repayments with interest), and who can’t get a debt consolidation because their debt is too high despite a steady income.
In it’s simplest form, a consumer proposal is an arrangement you reach with your creditors through the mediation of a trustee. You sign a legal contract and are immediately protected from debt collectors. You also agree to a partial repayment of the unsecured debts you owe (with your creditors agreeing to forgive the balance).
As with bankruptcy, one of the immediate pros of entering a consumer proposal is that it stops wage garnishments. In addition, interest also stops accumulating from the filing date and you’re no longer allowed to be hassled by collection companies and creditors.
Unlike with bankruptcy, you are not at risk of losing your assets (like your home or car), and you also don’t have to worry about owing any surplus income.
With a consumer proposal, you must repay only a portion of the debt you owe (rather than the full amount) and the maximum repayment period can not exceed 5 years.
As an added bonus, your credit score will not take as much of a beating with a proposal as it would with bankruptcy, and the sense of control you get to maintain over your finances can bring a greater peace of mind. Even creditors prefer consumer proposal over bankruptcy because they know they’ll get at least some of what is owed to them back.
While a consumer proposal has far more pros than cons (especially when compared to bankruptcy) there are a few notable points.
You can’t choose which debts are to be included (that’s up to the trustee and the creditors) and you can’t eliminate your child support or alimony obligations. You are also expected to honour certain student loan obligations. In addition, a consumer proposal does not take your secured debts (i.e. your home or car loan) into consideration.
Look at your situation and look at the pros and cons of both bankruptcy and consumer proposal and don’t be afraid to seek advice from a certified professional. Both situations are far more common than you think, and while it’s far from ideal, filing for bankruptcy or entering into a proposal are definitely not the end of the world.