If you’re in a financial bind and looking for solutions, you may have run across the term “consumer proposal.” While it is a valid alternative to bankruptcy, it is not always the ideal solution for every consumer looking to avoid bankruptcy. In fact, many consumers will benefit much more from filing bankruptcy than they will from a consumer proposal. In this blog, the Kentucky bankruptcy lawyers at O’Bryan Law Offices explain the key differences of a consumer proposal vs bankruptcy, as well as which option may work best for you. To schedule a free consultation with us, please call our office at 502-339-0222 today.
What Is a Consumer Proposal?
Consumer proposals are valid alternatives to having to declare bankruptcy. A consumer proposal is an agreement between a consumer and their creditors that is legally binding. The agreement outlines how the consumer or business will repay their debt to their creditors. While, at first glance, this may sound similar to a Chapter 13 bankruptcy filing, the two have notable differences. For example, consumer proposal payments must be set up through a Licensed Insolvency Trustee (LIT).
Consumers and businesses may opt for a consumer proposal if they want to avoid bankruptcy, but they cannot repay their debts. Licensed insolvency trustees offer consultations to businesses and consumers about their debts. After the consultation, they will draft a consumer proposal that outlines their debt repayment plan. Then, they send the proposal to the creditors for approval or denial. Essentially, the licensed insolvency trustee acts as an intermediary between the consumer or business and their creditors.
Should the consumer’s creditors reject the consumer proposal, they must either change the proposal or switch to another option, such as bankruptcy.
What Is Bankruptcy?
Bankruptcy is another valid debt relief option for businesses and consumers who are in a dire financial situation. Specifically, it is a type of legal process that the debtor initiates by filing a bankruptcy petition. Depending on which bankruptcy chapter is right for your situation, you will either set up a payment plan to pay back your debt over a certain period of time, or you can sell your assets and use the proceeds to repay your debts.
- In Chapter 7, debtors and businesses can discharge their unsecured debts. Unsecured debt is any form of debt that is not backed up by collateral. Examples of unsecured debts include credit card debt, medical debts, and unsecured loans. Secured debts are backed by collateral, which means that the lender can reclaim the collateral if the borrower defaults. Chapter 7 involves having the debtor sell their assets to pay off their debts. They may only keep exempt assets, such as clothing, tools of the trade, and a personal vehicle.
- In Chapter 11, businesses aim to reorganize their financial situation and stay in business in order to become profitable once again. This chapter aims to cut company costs, increase profits, and develop a plan to reach profitability.
- Those who make too much money to qualify for Chapter 7 can file Chapter 13. This form of personal bankruptcy allows individuals to achieve debt relief through monthly payments that span anywhere from three to five years. Unlike in Chapter 7, Chapter 13 filers may keep all of their assets.
How to Decide Between Consumer Proposal or Bankruptcy
Keep in mind that, regardless of what you choose, both bankruptcy and consumer proposals are legally binding choices. Many people believe that a consumer proposal is a less drastic choice than bankruptcy. However, different people can benefit from different debt relief options. What works well for one person may not work for another. Additionally, each option has its own filing requirements that you must meet in order to continue. Below, we outline the specific differences between a consumer proposal and bankruptcy.
Cost Difference Between Bankruptcy and Consumer Proposal
Generally, a consumer proposal has lower costs compared to a personal bankruptcy filing. Your Licensed insolvency trustee will collect a mandatory fee from each monthly payment that you make. This fee is included in your monthly payments, so you won’t have to worry about keeping up with multiple payments each month. Additionally, a consumer proposal has no upfront costs or filing fees.
Bankruptcy, however, generally involves certain costs, such as filing fees and legal fees. We highly recommend speaking with a qualified bankruptcy attorney to gain a better understanding of approximately how much your bankruptcy filing will cost. When you declare bankruptcy, your total costs will depend largely on your personal income and the assets you have.
Who Can Claim Bankruptcy or a Consumer Proposal?
Many people do not qualify for a consumer proposal. In some cases, liquidation bankruptcy may be your only option. This is especially true if your monthly income is very low or inconsistent. Below, we outline the basic qualifications of each.
- You must be 18 years of age or older.
- The total debt must be less than $250,000, excluding your mortgage.
- You must be insolvent, which means that you owe more money than you have in assets and income.
- You must consult with a licensed insolvency trustee before you can file a consumer proposal.
- Also, you must have enough stable monthly income to repay part of your unsecured debt.
- If you began a consumer proposal in the past and could not complete it, you may not file a new one.
- You must also be insolvent in order to file bankruptcy.
- You must meet the requirements for whichever bankruptcy chapter you decide to file. Chapter 7 has an upper limit on your income which bars you from being able to file under that chapter. If you make too much money for Chapter 7, you might still qualify for Chapter 13. We recommend taking the bankruptcy means test to determine which chapter is right for you.
What Assets Are Affected by Bankruptcy or Consumer Proposal?
This depends on a number of factors, including which bankruptcy chapter you file. In Chapter 7, you may lose a significant portion of your assets, except for those that are exempt through legal protection. In both consumer proposal and bankruptcy Chapter 13, you are not required to surrender assets. Instead, you opt for a debt settlement and agree to pay back a portion of your unsecured debt.
Which Debts Can Be Included in Consumer Proposal and Bankruptcy?
Consumer proposals cover most unsecured debts, but the amount that it wipes out depends on certain factors. You must be able to pay back approximately 20-40% of your unsecured debts. Some examples of these debts include the following.
- Student loan debt that is more than seven years old
- Personal loans
- Payday loans
- Credit card debts
- Tax debts
In a Chapter 7 bankruptcy case, you can receive a discharge for the following types of debts.
- All of the above
- Credit accounts that were sent to collections
- Medical debt
- Repossession deficiencies
- Business debts
- Legal fees
- Utility fees
- Personal injury claims against you
- Rent and lease payments that are past due
We recommend speaking with qualified debt relief specialists to determine which of your debts are able to be cleared or discharged under a consumer proposal vs bankruptcy.
Can You Switch from a Consumer Proposal to Bankruptcy?
Technically, yes. We understand that someone’s financial situation may drastically change at any moment. For this reason, it is possible to cancel your consumer proposal filing and instead file bankruptcy. However, if you cancel your consumer proposal early, there are important consequences to keep in mind.
If you file a consumer proposal and then cancel it, you cannot qualify to file another proposal in the future. Before canceling your proposal, consider taking other steps first. For example, you could negotiate your monthly payment plan or defer payments. However, if you can no longer afford to make your payments, claiming bankruptcy may be your only option.
In order to qualify for another consumer proposal in the future, you must complete your first proposal. Defaulting on a consumer proposal bars you from filing again in the future. Additionally, you cannot file two consumer proposals at once.
How Long Do Consumer Proposals and Bankruptcies Stay on Your Credit Report?
Many people wonder how consumer proposal and bankruptcy filings will affect their credit rating. This is an understandable concern, as your score from major credit reporting agencies will affect many of your future decisions. Both a consumer proposal and bankruptcy will cause your credit scores to drop. However, depending on your credit history, a consumer proposal may result in a less significant drop in your credit score.
In both cases, obtaining new unsecured creditors and credit accounts will be more difficult. A consumer proposal remains on your credit report for up to three years after a successful consumer proposal. A bankruptcy filing, however, can remain on your credit report for up to seven years.
In the next section, we discuss the benefits of both consumer proposals and bankruptcy.
When Is a Consumer Proposal a Better Debt Solution Than Bankruptcy?
For some individuals, a consumer proposal is preferable to bankruptcy. Those with a stable monthly income may benefit more from a consumer proposal than from bankruptcy. It’s also important to remember that the costs associated with a consumer proposal are often lower than those associated with bankruptcy. However, we highly recommend speaking with a qualified bankruptcy professional about your financial situation. You may find that Chapter 13 is a better option for you than a consumer proposal.
Is Bankruptcy a Better Debt Solution Than a Consumer Proposal?
In many cases, consumers and businesses benefit more from filing for bankruptcy than they do from a consumer proposal agreement. Below, we list a few reasons why bankruptcy can be a better option than a debt settlement plan.
Bankruptcy Is a Faster Process
If your goal is to quickly rid yourself of unmanageable debt, the bankruptcy process can be much faster than a consumer proposal. Once you have filed bankruptcy, you receive the protection of the automatic stay. This prevents your creditors from harassing you about making monthly payments on your debts.
You Don’t Have to Repay Your Debts
If you do not have a significant source of income, or if you are unemployed, Chapter 7 bankruptcy is often a better option than consumer proposals. A liquidation bankruptcy allows you to discharge certain debts without being required to pay back your debts.
Bankruptcy Has no Limit on Debts
Unlike consumer proposals, bankruptcy has no upper limit on the amount of debt that you can have when you file. Consumer proposals allow up to $250,000 in debt, while bankruptcies do not limit how much debt you can have. Therefore, if you have massive amounts of debt, bankruptcy may be your only option.
Consumer Proposal vs Debt Consolidation
Some consumers consider debt consolidation as one of their many debt relief options. However, we often advise against working with debt management or debt consolidation companies. In many cases, we see consumers who were promised an easy plan to become debt free, but they ended up accumulating more debt than they had to begin with. If you opt for a debt consolidation loan, chances are that you’ll end up paying much more than you would have if you filed for a consumer proposal or bankruptcy.
How Can a Kentucky Bankruptcy Attorney Help Me?
At O’Bryan Law Offices, our bankruptcy lawyers are not only compassionate, but are also extremely knowledgeable about our field. We make sure to stay up to date on all the latest policy changes and requirements in terms of bankruptcy and other debt relief solutions. We also understand that figuring out your bankruptcy payments and submitting all the proper paperwork can be a stressful task to handle on your own.
That’s why we are a full-service bankruptcy law firm with a stellar reputation among our clients and our peers. We will take our time understanding your individual situation and needs before formulating a plan to resolve your bankruptcy case. If you’re looking for attention to detail, a passion for helping others in need, and the security of working with a highly knowledgeable attorney, we’re here for you.
Contact a Louisville Bankruptcy Lawyer Today
If you are struggling under a mountain of debt and there seems to be no end in sight, O’Bryan Law Offices has a solution for you. We understand that bankruptcy is a scary term for many people, but we believe in its power to bring about a fresh financial start. While you focus on planning for your future, we’ll do all the heavy lifting in terms of paperwork, filing, and much more. To schedule your free consultation with us, please call our office at 502-339-0222 today.