Personal bankruptcy is often considered a last resort for individuals who cannot repay their debts. It’s a legal process that provides a fresh start by eliminating most unsecured debts, such as credit cards, lines of credit, personal loans, and overdue bills. In exchange, you may have to surrender certain assets, depending on provincial laws and the number of assets you own. If you file for bankruptcy, debts included will drop to a 9 on your credit report (ie, R9 or I9 depending on your debt type) —the lowest possible score—and the bankruptcy will remain on your credit history for six years after discharge, if it’s your first time in bankruptcy (note - in some provinces it is seven years).

Credit codes are used to categorize different types of credit. An "I" code typically refers to installment loans, such as car loans, where you repay a fixed amount each month over a set period. An "R" rating indicates revolving credit, like credit cards, where you can borrow up to a certain limit and repay the balance each month.

We’ve used “R” in the below examples as that’s the most common one you’ll see on your report.

Bankruptcy payments are determined based on your monthly income and household income. The higher your income, the more you may be required to pay, which is known as a surplus income payment. Bankruptcy can also impact future lines of credit and your ability to take out loans for several years, as it stays on your public record.

A consumer proposal is a legally binding agreement between you and your creditors to repay a portion of your debt over an extended period of time, up to five years. This option is often chosen by individuals who want to avoid the more drastic measures of bankruptcy while still reducing their debt load. It offers a way to consolidate your debts into one monthly payment based on your situation, which is often less than the total amount owed.

Consumer proposals cover unsecured debt such as credit cards, tax debts, and lines of credit, while allowing you to keep your secured assets like your home or car, provided you continue making payments on them.

Unlike bankruptcy, a consumer proposal does not require you to surrender assets, and it provides legal protection from creditors, including stopping wage garnishments and lawsuits. However, it will still affect your credit rating, and the proposal will be reported to credit bureaus and noted on your credit report with an R7 rating for up to six years.

Debt consolidation involves taking out a new loan to pay off multiple debts. The idea is to combine several high-interest debts into one lower-interest loan with a single monthly payment. Debt consolidation is often used to manage current debts like credit cards, lines of credit, and personal loans. This solution can make it easier to manage debt issues, but your success will depend on your ability to secure a favorable interest rate and make consistent payments over time.

Debt consolidation can be challenging to secure, especially if your debts are spread across multiple financial institutions or if you have a history of missed payments. Obtaining a consolidation loan often involves convincing a lender to assume the risk of repaying debts from another institution, which can be difficult if your credit history is less than ideal.

Unlike bankruptcy or a consumer proposal, debt consolidation doesn’t offer formal legal protection from creditors. However, it can prevent you from defaulting on loans if you’re able to secure better terms. Additionally, debt consolidation doesn’t have the same severe impact on your credit score as the other options, though missed payments could still damage your credit history.

When comparing a consumer proposal and bankruptcy, it’s important to look at the key differences that set them apart. In a consumer proposal, you are allowed to keep all unless your proposal terms include the sale of an asset, while in bankruptcy, you may have to surrender valuable assets like your home or car. Bankruptcy can offer quicker debt discharge but leaves a more significant mark on your credit history, whereas a consumer proposal provides a structured repayment plan with less severe credit consequences.

Monthly payments differ as well. With a consumer proposal, you make fixed, affordable payments over a longer period, while bankruptcy payments can fluctuate depending on your household income and any additional earnings during that time. Both solutions offer legal protection from creditors, stopping wage garnishments, lawsuits, and collection calls, but only bankruptcy fully wipes out your unsecured debts.

In both cases, you’ll also be required to attend financial counseling sessions to help you better manage your finances moving forward.

Understandably, this can get a bit confusing. CSVan is happy to help you determine which debt solution is right for you.

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Both consumer proposals and personal bankruptcies can address most unsecured debts such as credit cards, personal loans, tax debts, and overdue utility bills. However, they do not typically cover secured debts, like mortgages or car loans, unless you default on the payments for those assets. Debt consolidation can also cover unsecured debt, provided you qualify for a consolidation loan.

Choosing between a consumer proposal, bankruptcy, and debt consolidation will impact your credit score and credit report in different ways. Filing for bankruptcy results in an R9 rating, the lowest possible, which stays on your credit report for six to seven years if it's a first-time bankruptcy. A consumer proposal leads to an R7 rating, and it stays on your credit history for three years after you’ve completed the proposal, or six years from the filing date, whichever comes first.

Debt consolidation may impact your credit score depending on whether you can secure a favorable loan and maintain your payments. If you make all your monthly payments on time, you may see an improvement in your credit. However, any missed payments could cause further damage to your credit rating.

After resolving your debt through any of these solutions, it’s important to think about your long-term financial planning. Both bankruptcy and consumer proposals require you to complete financial counseling sessions to help prevent future debt issues and teach you how to manage your finances better. These sessions are critical in helping individuals with poor credit history develop better habits, such as budgeting and planning for the future.

In both bankruptcy and consumer proposals, you are granted legal protection from creditors, meaning that once the process begins, all collection actions, including wage garnishments and lawsuits, must stop. This provides essential peace of mind for those struggling with unmanageable debt.

Choosing between a consumer proposal vs. bankruptcy or debt consolidation depends on your financial situation, the types of debt you have, and your long-term financial goals.

Want help finding out what is best for your situation? Contact us for a free consultation.

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