Consumer proposal, bankruptcy last resorts for debt relief

OTTAWA – By the time a potential client walks into bankruptcy trustee Andre Bolduc’s office, they have generally reached the end of their financial road, unable to pay their debts.

They have exhausted all the other possibilities including, consolidation loans, restructuring their budget or even getting a second job, leaving them with two options.

A formal consumer proposal to creditors or bankruptcy.

“Both of them will stay your creditors and give you relief from your creditors,” said Bolduc, a senior vice-president at BDO Canada.

The most common route for those in dire financial straits is the consumer proposal.

Under the proposal process, debtors strike a deal with their creditors to pay a portion of what they owe over a period of up to five years. Creditors will often agree to proposals because they will end up getting more than they would under a bankruptcy process.

The proposal process also makes it easier for you to keep your house which you may be forced to sell in bankruptcy.

Doug Hoyes, co-founder of bankruptcy trustee firm Hoyes, Michalos & Associates Inc., says many of his clients pick a consumer proposal over bankruptcy, even if it costs them more.

“Most of the people I deal with don’t want to go bankrupt, they want to at least pay some of their bills, they want to at least make some kind of arrangement with their creditors,” he said.

However, there are limits.

Your total debt cannot exceed $250,000, excluding a mortgage, and you’ll need to be able to show that you’ll be able to repay at least a portion of what you owe.

Your creditors aren’t obligated to accept a proposal just because you make one, and you need to convince them that they would be better off than if you went bankrupt.

But Bolduc said there are scenarios when bankruptcy may make more sense.

“We’re talking about individuals that have a low income and can probably not afford to pay more money in a consumer proposal because they have other priorities such as food and shelter,” he said.

Under a bankruptcy, you surrender your assets which are then sold to pay your creditors. You are allowed to keep your car, personal possessions and other things within certain limits, but otherwise they must be handed over and you will have to make monthly payments during your bankruptcy depending on how much you make.

You may also face the prospect of having to sell your house, depending on how much it is worth and how much remains on your mortgage.

If your home is worth more than the mortgage, you will need to pay the bankruptcy trustee the equivalent of any equity value in your home or face the possibility it might have to be sold.

While a consumer proposal can last up to five years, a first-time bankruptcy is generally shorter. Depending on your income, it will generally last nine to 21 months before you are discharged.

Both a bankruptcy and a consumer proposal can cover unsecured credit and debt like credit card debt, unsecured bank loans, lines of credit, payday loans and unpaid bills.

However, they will not deal with secured debt like your mortgage, secured car loan or lease.

They will also not include debts like spousal or child support, court imposed fines and student loans that are less than seven years old. You will still have to pay those debts.

Bolduc says if you’re having trouble paying your debts, you need help and the sooner you ask for it, the better.

“I think it is important for the public to understand that if they are in financial difficulty, they are not alone,” he said.