Bankruptcy is not the only option for someone with severe debt, there is another option that people should be aware of, namely the consumer proposal.

While in a bankruptcy your assets are assigned to a trustee (subject to exemptions) who then liquidates them to pay off your unsecured creditors, this is not the case with a consumer proposal. The consumer’s proposal, under the Insolvency and Bankruptcy Law, is an offer to pay his secured creditors an agreed amount of money to extinguish his debts and thus avoid bankruptcy. This money is paid without interest for a period of up to 5 years.

When a consumer proposal is submitted, 3 important things happen:

Interest stops on your debts

Your assets are protected from creditors and there is a stay of proceedings

Creditors can no longer contact you by phone, mail or any other means

As long as you keep up the payments, your assets are protected by law. This option is often preferred by people with savings or equity in their home or small business owners who need to protect their business assets to maintain an income. If three payments are missed, the proposal is canceled and you are right back where you started.

Consumer proposals negatively affect credit and are reported to the Equifax and Transunion credit bureaus up to 3 years after the proposal is paid. One option to speed up credit building is to pay off the proposal sooner, which will remove it sooner from the credit bureau.

Other advantages of the consumer proposal over bankruptcy are:

If your income increases during a proposal, payments to creditors do not. In a bankruptcy, your income is monitored and payments to creditors are adjusted accordingly.

Inheritances and windfalls are kept, while creditors are paid in bankruptcy.

You can still be a director of a company, whereas in a bankruptcy you cannot

You can still sponsor someone in Canada, in a bankruptcy you cannot do this until you are discharged.

There is an opportunity to rebuild your credit faster by paying your proposal early

Bankruptcy is not the end of the world as some people may believe and can be seen as a good opportunity to hit the reset button and start over. Even if there are assets that can be seized in a bankruptcy, the debtor generally has the option of paying additional funds instead of the value of the asset.