Bankruptcy or consumer proposal: differences and full comparison
Bankruptcy or consumer proposal? In this post, we will help you understand more about them. That way, you can choose the best option for you to solve your financial problems. So, read on!
Learn the differences and which is the best between bankruptcy or consumer proposal
If you have a financial problem, you can try to solve it in many ways. Two of which are bankruptcy or consumer proposal. Usually, in a bankruptcy proceeding, all of your debts are discharged or canceled. And you can start fresh with a clean slate. A consumer proposal is a bankruptcy alternative wherein consumers offer their creditors a lump sum repayment plan. The creditor will accept this repayment plan if it is fair and reasonable.
Moreover, many different factors influence whether one option is more favorable than the other. It includes credit score, income level, and length of time in debt. This post provides information about each solution as well as how to go about making the decision between them. So, read on to know more about both solutions and what they mean for your future finances.
What is a personal bankruptcy and how bad is it?
Personal bankruptcy is a process for those in debt who need to relieve their debts legally and with financial counseling. This process allows this person to start building a better financial future. Also, to understand more about what is bankruptcy, you should understand the difference between exempt property and on-exempt property.
Exempt property means any property that your creditors cannot claim to pay down your debt. In some places, if you fail to pay your mortgage, your creditor cannot claim your household items and the house itself. As for non-exempt property, it means any other property that your creditor can claim.
In addition, when you apply for bankruptcy, you will probably need to surrender your non-exempt property. And this will clear your debts. However, you can keep the important assets (exempt assets), such as the house you live in, your only car. Which asset you will keep depends on the laws of the country and the place you live in.
Filing personal bankruptcy can be pretty bad, but it may be the best option for those who are really deep in debt. Also, you can get a pretty intense impact on your credit, which can last for up to 6 years after you complete the process.
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What is a consumer proposal and how bad is it?
A consumer proposal is also a legal way to solve your financial problems. When you start the process of a consumer proposal, you will be making a debt settlement agreement with your creditors. Also, you will need to work with a professional to help you understand how much you can pay and set up a repayment plan for your creditors to approve.
Therefore, with a consumer proposal, you can even pay less than the original amount you owe. However, there is a maximum amount of debt required to make a consumer proposal. So, you will probably need to have a maximum of $250,000 in debt to qualify. And with a consumer proposal, you will not be able to include debts ordered by a court, such as child support and some student loans.
In Canada, you can look for a Licensed Insolvency Trustee to help you with your consumer proposal. This professional will structure a repayment plan after analyzing your debt and your personal information. The purpose of this process is to determine if you really cannot afford to pay down your debt. This is very important because if you cannot afford to pay a part of your debt, you will probably need to find another way to solve your financial problems, like bankruptcy.
Is consumer proposal different from bankruptcy?
Both a consumer proposal and bankruptcy are legal options for those who need to solve their debt problems. However, they have many differences. A consumer proposal can be a better way of solving your debt problems because it has less impact on your credit and is less aggressive than bankruptcy.
With a consumer proposal, you can pay a certain amount of your debt and get the chance to keep all your assets. With a bankruptcy process, you will probably need to surrender all your non-exempt assets, and your credit will be impacted for up to 6 years.
Is a proposal better than bankruptcy?
If you can pay for at least 20% of your debts, a consumer proposal may be the best option. However, if you cannot afford to pay for any or almost any of your debt, you might have to file for bankruptcy. The rule is that the more debt you have, the worse it is. This is because a consumer proposal is the best option in terms of credit impact and other deals. However, you need to be able to pay for some of your debt and in monthly payments.
Therefore, those who need to file for bankruptcy have this as their only option left. So, if you have a bit less debt and want to make a repayment plan, a consumer proposal may be best. However, we recommend that you always look for a Licensed Insolvency Trustee to help you analyze your finances and see which is the best option for you.
Bankruptcy or consumer proposal: which you should choose?
Before you consider any of these two options, you can look for other debt repayment options in your area. However, if you are considering this, you might already have tried many other options. Therefore, we will show you a list of what are the most impactful consequences of filing bankruptcy of making a consumer proposal:
- Your credit score will be immediately impacted after filing for a consumer proposal.
- Overall, a consumer proposal will impact your score for three years after all your repayments. Also, a bankruptcy process may impact your score for six years after you start the process.
- It will be very difficult to apply for loans and credit cards after filing for a consumer proposal or bankruptcy.
- Your ability to finance a car or a home will be seriously impacted.
- You will probably have a hard time easily renting houses.
- You might have a hard time finding a job in certain positions related to finances.
The items mentioned above are only a few of the serious impacts a consumer proposal or bankruptcy might have on your life. Also, in both cases, you will probably need to pay some specific debt even after completing the process. It includes child support, student loans, fines and penalties imposed by a court, and others depending on the country’s laws.
So, as finances are a serious issue, we recommend that you do a lot of research before considering any of these two options. Also, you should find a professional to help you analyze your situation and choose the best option for your finances.
Also, after you have finished your process of filing for a consumer proposal or bankruptcy, you might need a plan to rebuild your finances. And one of the ways to do this is to earn some extra money. So, check our post below with information about how to make extra money at home!
About the author / Victória Lourenço
Reviewed by / Aline Barbosa
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