Consumer Proposal Versus Bankruptcy: How To Choose Which Option Is Best For You

If you find yourself in debt, and you are falling behind on payments or just overwhelmed by the amount owed, then help is available to you. However, it can be intimidating to understand what options are available and how to know which direction to proceed. Since there is no "one size fits all" option to provide the help you need, you should learn more about each before making a decision. Here is information to help you choose:

What are your options for settling debt?

Canada offers two primary options for consumers who need debt relief, and both of these are provided for in the Bankruptcy and Insolvency Act:

• Consumer proposal - a consumer proposal is a formal offer extended to creditors that consolidates existing debt into a single amount. Consumer proposals allow the debtor to make fixed monthly payments on the balance owed; the period of time allowed by law for repayment can be up to five years in length.
• Personal bankruptcy - this action consists of filing a legal request that all personal debts be discharged. The discharge of debt is supervised by the Office of the Superintendent of Bankruptcy, and is facilitated under the guidance and advisement of a trustee.

Both debt relief options have certain conditions, such as a requirement to undergo consumer credit counseling to learn how to effectively manage finances and avoid future hardship. You will also be required to surrender credit cards in your possession, and 

What kind of debts do you owe?

The kind of debt owed can play a large part in which direction you choose to go. Here are the types of debt divided into broad categories:

• Unsecured debt - This includes credit cards, personal loans and any other debt that is not backed-up by some type of collateral. It can be packaged together for consolidation in a consumer proposal. Unsecured debt may also be discharged in a bankruptcy proceeding.
• Secured debt - This includes mortgages, car loans, and any other debt backed by collateral, and cannot be included as part of a consumer proposal. Each secured debt must be negotiated on an individual basis with the creditor if a debtor needs relief; keep in mind that creditors are not obligated to change the terms of financing, though some will if they can be persuaded that it is in their best interest to do so. However, secured debt can be included in personal bankruptcy, which provides you with more flexibility to handle debt.

If the bulk of your debt is unsecured, then a consumer proposal makes the most sense if you are in a position to make some type of payment. However, if you are under a heavy debt burden that includes significant secured debt, then you should explore bankruptcy since those obligations may be discharged via that route. Keep in mind that bankruptcy will require that you surrender personal assets, with some exceptions, to help pay what is owed to creditors.

What can be done about special types of debt?

In addition, you need to remember that special types of debt are not eligible for inclusion in consumer proposals and bankruptcy. Some of these special debts include:

• Alimony payments
• Child support payments
• Student loans (in some circumstances)
• Fines and restitution payments
• Debts incurred by illegal activity

If you find yourself with any of the above debts and are not able to pay your monthly obligation, then you should contact a bankruptcy trustee for assistance. They may be able to help you find other solutions, such as a court-ordered restructuring of payments. The worst thing you can do is to ignore your problem; failure to pay child support, for example, can result in criminal charges. To help you decide on the best path, and to help you handle your finances better afterwards, you may also want to consider credit counselling.