When financial challenges feel overwhelming, finding a clear path forward is crucial. Whether you’re struggling to keep up with debt payments or feeling uncertain about what steps to take, the options of bankruptcy and consumer proposals can provide much-needed relief and a fresh start. But each option has unique pros and cons, and understanding them can make all the difference. At Golding & Associates, Licensed Insolvency Trustees (LIT) in Nova Scotia, we’re here to guide you through these options and help you choose the one that best suits your financial needs and long-term goals.
So, what exactly are bankruptcy and consumer proposals? Let’s break down each option and explore which might be the right solution for you.
What Is Bankruptcy?
Bankruptcy is often considered a last-resort option when debts have become unmanageable. It’s a legal process that allows you to clear away much of your debt, giving you a chance to start over. As a Licensed Insolvency Trustee, we help you through each step of this process.
When you file for bankruptcy, most of your unsecured debts, such as credit card bills, payday loans, and tax debts, are “discharged” or eliminated, which means you’re no longer legally required to pay them. However, there are some exceptions: fines, support payments and student loans where 7 years has not passed since the debtor ceased to be a student. We will discuss with you if any of these debt types apply to your situation. Secured debts, like mortgages or car loans, aren’t included in a bankruptcy filing if they are assets you want to keep.
How Does Bankruptcy Work?
- Initial Assessment: The process begins with an assessment by a Licensed Insolvency Trustee. During this meeting, we review your financial situation to determine if bankruptcy is the best solution.
- Filing the Bankruptcy: If you proceed, we file the necessary paperwork with the Office of the Superintendent of Bankruptcy (OSB). This automatically puts a “stay of proceedings” in place, which prevents creditors from pursuing you for debts.
- Your Duties: During the bankruptcy process, you’ll be responsible for completing some duties, such as attending two financial counseling sessions, reporting your income, and possibly making payments if you earn over a certain threshold. These duties are designed to help you gain better financial control.
- Discharge from Bankruptcy: In many cases, a first-time bankruptcy can last nine months. Once you complete the required duties, your debts are discharged, and you’re free to rebuild your financial life.
The Pros and Cons of Bankruptcy
Pros:
- Debt Relief: Bankruptcy discharges most unsecured debts, giving you a fresh financial start.
- Immediate Protection from Creditors: Filing bankruptcy stops all creditor actions, like wage garnishments and collection calls.
- Structured Process: With clear guidelines and support from your Licensed Insolvency Trustee, the bankruptcy process is often straightforward.
Cons:
- Credit Impact: Bankruptcy will appear on your credit report for six years after discharge for a first bankruptcy, which can make it challenging to access credit during that time.
- Loss of Assets: In some cases, you may be required to surrender certain assets. However, many essential assets are protected under provincial law.
- Surplus Income Payments: If your income is above a specific limit, you may be required to make additional payments for a portion of your bankruptcy term.
Bankruptcy can be a good option for individuals who have limited assets, significant debts, and no feasible way to repay them.
What Is a Consumer Proposal?
A consumer proposal is an alternative to bankruptcy that allows you to settle your debts by negotiating a repayment plan with your creditors. Instead of eliminating your debts entirely, a consumer proposal enables you to pay back a portion of what you owe over a more manageable timeline.
In this process, your Licensed Insolvency Trustee acts as a mediator, working to create a proposal that your creditors will accept. A consumer proposal typically includes a reduced repayment amount and an extended payment period of up to five years.
How Does a Consumer Proposal Work?
- Initial Assessment: Much like bankruptcy, the process starts with an assessment to understand your financial situation.
- Creating the Proposal: Your Licensed Insolvency Trustee works with you to create a proposal that outlines how much you can realistically repay over a set period.
- Creditor Voting: Once the proposal is filed, your creditors vote on whether to accept it. If the majority agree, the proposal becomes legally binding on all unsecured creditors.
- Repayment Period: You then make affordable monthly payments according to the terms of the proposal. Once completed, any remaining debt included in the proposal is forgiven.
The Pros and Cons of a Consumer Proposal
Pros:
- Avoids Bankruptcy: A consumer proposal is an option to reduce your debt load without filing for bankruptcy, making it a popular choice for those who want to maintain control over their financial future.
- Debt Reduction: You typically only need to repay a portion of your total debt, which can significantly reduce the amount owed.
- Asset Protection: Unlike bankruptcy, a consumer proposal generally allows you to keep your assets, such as your home or car.
- Less Impact on Credit: While a consumer proposal does affect your credit score, the impact is usually less severe than bankruptcy. It remains on your credit report for three years after completion, which is shorter than a bankruptcy’s six years.
Cons:
- Requires Repayment: A consumer proposal involves repayment, so if your financial situation is extremely tight, you may still struggle with these payments.
- Lengthy Process: A consumer proposal can last up to five years, which means it’s a longer commitment than a nine-month bankruptcy.
- Creditor Approval: For the proposal to proceed, a majority of your creditors need to agree, so there’s a chance it could be rejected.
A consumer proposal can be an ideal option if you have a steady income, manageable debt levels, and assets you’d like to protect.
Bankruptcy vs. Consumer Proposal: Key Differences
| Aspect | Bankruptcy | Consumer Proposal |
| Debt
Discharge |
Most unsecured debts are discharged. | Only a portion of the debt is repaid. |
| Credit Impact | Stays on your report for 6 years (first-time bankruptcy). | Stays on your report for 3 years after completion. |
| Asset Protection | Some assets may be surrendered. | You can usually keep your assets. |
| Length of
Process |
9 months to 21 months, depending on surplus income. | Up to 5 years. |
| Creditor Approval | Not required. | Requires majority creditor approval. |
| Monthly Payments | Possible surplus income payments if income is above a threshold. | Fixed monthly payments for the proposal term. |
Choosing the Right Option for You
Understanding which debt relief option is best suited to your circumstances depends on a few key factors:
- Income Level: If your income is low or inconsistent, bankruptcy may be a better choice since it does not require a set repayment amount. Conversely, a consumer proposal may be more manageable for those with a steady income.
- Asset Ownership: If you own significant assets (such as a home or car) and want to retain them, a consumer proposal is often the better choice. Bankruptcy may involve surrendering certain assets.
- Amount of Debt: Consumer proposals are only available for debts up to $250,000 (excluding your mortgage). If your debt is higher, we would have to explore other options.
- Desire for Debt Relief vs. Reduced Repayment: If you want a complete discharge of debt, bankruptcy offers the quickest path. A consumer proposal, however, allows you to repay a portion of your debt at a reduced amount, giving you more control over the process.
- Future Financial Goals: Consider your long-term plans. While both options affect your credit, bankruptcy typically has a more severe impact. If you want to buy a house or access credit sooner, a consumer proposal might be a better fit since the credit impact is shorter.
Making Your Decision
Deciding between bankruptcy and a consumer proposal can feel overwhelming, but you don’t have to go through it alone. Here at Golding & Associates, we’ve helped many people across Nova Scotia find the right path to debt relief. We understand the unique challenges that come with financial difficulties and are dedicated to guiding you through the process with compassion and expertise.
What’s Next? Book a Free Consultation
The first step toward financial recovery is understanding your options. With a free consultation, we’ll go over your financial situation and explore whether bankruptcy or a consumer proposal is best suited for your needs. We’re here to answer your questions, address your concerns, and help you build a roadmap toward a brighter financial future.
Financial hardship can happen to anyone, but with the right support, you can regain control and find your way to a fresh start. Whether you’re considering bankruptcy or a consumer proposal, Golding & Associates is here to help you take the first step with confidence.
Ready to discuss your options? Contact us today to book your free consultation. Together, we can find the debt relief solution that’s right for you.