Top Frequently Asked Questions About Consumer Proposals and Insolvency

If you are facing insolvency, bankruptcy does not have to be the only solution. A consumer proposal can help you get your debt under control and pay less than the amount you originally owe. Filing a consumer proposal can save you from the effects of bankruptcy or unresolved debt.
We’ve answered the consumer suggestion FAQs below to empower you to take control of your finances and get out of debt seamlessly.

What is a consumer proposition?

A consumer offer is an offer you make to your creditors to settle your unsecured debt(s) for less than the current amount.

This debt management solution is made possible through the Bankruptcy and Insolvency Code, and consumer proposals are binding offers made through a licensed insolvency trustee e.g. Harris and company. The goal is to settle your unsecured debts for a lower amount and/or develop a payment plan to deal with the outstanding debts.

If your application is approved, you can pay off your debt in one lump sum or make monthly payments over a specified period.

On the positive side, consumer suggestion can:

• Reduce your total debt
• Protect you from creditors/debt collectors
• Help you avoid bankruptcy
• Allows you to keep your assets
• Help you avoid additional benefits after submitting your proposal
• Achieve flexible payment terms

However, these arrangements also have certain disadvantages, such as:

• Negatively impact your credit history for up to six years after applying
• Potentially lengthen your debt repayment period
• Hurting your ability to get new credit
• Coverage of unsecured debts only, not secured debts (e.g., mortgage, car loans)

When weighing these pros and cons, many consumers discover that consumer propositions are better than filing for bankruptcy, especially since their assets are protected.

What is insolvency?

Insolvency is a term that refers to someone’s inability to meet their debt obligations when they fall due. This can happen when your current debt exceeds your current assets or from an inability to pay your bills in a timely manner.

Insolvency vs Bankruptcy

Insolvency occurs when an individual’s liabilities exceed their assets, meaning they owe more money than they have and cannot repay their debts. Insolvency is not the same as bankruptcy. The latter is a specific legal process in which insolvent individuals declare their inability to repay their debts.

Here is a quick overview that explains the difference between insolvency and bankruptcy:

• Domain: Insolvency is not a matter of public record, while bankruptcy is.
• outcome: Insolvency is a state of financial affairs, while bankruptcy is a legal process.
• Credit impact: Bankruptcy usually has more serious and lasting effects on credit.

In other words, insolvency is an informal situation that lacks the legal and financial implications of a formal bankruptcy declaration.

What are the differences between a consumer proposal and bankruptcy?

Consumer propositions and bankruptcy are two legal processes for dealing with debt. The main difference is that in a consumer proposal, you will negotiate a new debt plan with your creditors that allows you to repay your debts over a specified period, usually five years.

In bankruptcy, your assets are seized and used to pay off your creditors, and your remaining debts are paid off.

So what is the best option? In general, bankruptcy should be considered a last resort. As you pay off your debts, you will lose assets in the process, and this will usually have a greater impact on your credit report.

Only choose bankruptcy if you have no way to repay your debts and cannot negotiate a low enough settlement amount, given your current financial situation.

“It is always best to explore all options before deciding on your debt relief solution, however, it is usually recommended to try out the proposal first, before proceeding with bankruptcy.”

Joshua Harris, Partner and Licensed Insolvency Trustee, Harris & Partners

Long-term effects on credit

Both a consumer proposal and bankruptcy will negatively impact your consumer credit history. However, these options will affect your credit differently, with bankruptcy typically having the most dramatic impact on credit scores.

How long will the consumer offer remain on my balance?

Consumer suggestions will be included in your credit score for three years from the date you complete payments or six years from the date you apply, whichever comes first.

During your repayment period, your credit report will be assigned a rating of “R7,” indicating that you are making consumer suggested payments through a consumer suggestion.

How long will bankruptcy remain on my credit?

In Canada, the length of time your bankruptcy stays on your credit report depends on whether it is your first or second bankruptcy. First bankruptcies will stay on your report for six to seven years after discharge, depending on which province you live in, while second bankruptcies will stay on your credit report for 14 years.

Impacts on your existing assets

One of the main reasons many people choose to file a consumer proposal is that it does not affect their assets in the same way that filing for bankruptcy does. As long as you are able to make monthly payments to pay off your consumer offering, what you own will remain yours.

What happens to my assets in the consumer view?

With a consumer proposal, you will negotiate with your unsecured creditors for a lower debt settlement, then make a lump sum payment or establish a monthly payment schedule that allows you to pay off your debts within years.

Your assets will be fully protected – your creditors can’t touch anything other than the consumer proposal payments you submit.

What happens to my assets in the event of insolvency?

Insolvency is an informal state of being unable to pay your debts. Your assets are not at immediate risk when you are insolvent, but if you declare bankruptcy, your assets can be seized and then liquidated to help pay off your debts.

However, some assets are exempt, although the amount/value varies by county. Exemptions generally include:

• Personal clothing
• Tools of the trade
• Cars (value varies by province)
• Home Furnishings/Appliances
• Retirement accounts
• Life insurance documents

Many provinces place limits on these assets, with some also exempting a certain amount of farmland from expropriation.

How do I rebuild my credit after a consumer proposal or bankruptcy?

Once your debt is paid off through a consumer proposal (or the debt is eliminated through bankruptcy), it will be necessary to rebuild your credit. This may take some time, so it’s important to develop sound financial habits that you can maintain over the long term.

You can improve your credit score by:

• Pay your bills on time every month.
• Automate your invoices to ensure on-time payment
• Keep your credit card balances low
• Avoid new credit card applications
• Becoming a joint cardholder with another individual
• Check your credit report for errors

Enrolling in credit counseling sessions can deepen your understanding of sound financial principles and provide you with tips you can use to manage your bills, make debt payments, and more.

Is my husband responsible for my debts?

In general, your spouse is not responsible for any debts you personally accumulate. However, if you took out a loan together, you will be jointly responsible for the debt.

If this happens, you can file a joint consumer proposal, which allows both parties to negotiate a joint debt. Otherwise, Canadian privacy laws prevent creditors from disclosing details to your spouse, even if one party makes a consumer offer. If you file for bankruptcy, that filing will become a matter of public record.

While one spouse may not be liable for the other’s debts, financial gifts from the debtor may affect your tax obligations.

According to the Canada Revenue Agency (CRA), if a debtor transfers money or property to you, the CRA can collect that debt under Article 160 of the Income Tax Law. In other words, if you receive a gift from a debtor (including your spouse), the CRA may seize those assets once they are transferred to you.

Overcome your debt

If you have outstanding unsecured debt due to credit cards, utility bills, personal loans, or other reasons, a consumer proposal is one option that can provide a way out. Filing a consumer proposal will allow you to negotiate a lower settlement without the implications of filing for bankruptcy while allowing you to keep your assets.