These are the two primary forms of protection that individuals who can no longer afford to pay for their debts can seek. And, despite the many differences, I have to say that from personal experience, most lenders consider the two almost equivalent. The reason for this being that proposals are not actually a meaningful contribution to the lender’s repayment. Effectively, because the commitment is so small, and is forced onto the lenders by the trustee through bankruptcy procedures, instead of being individually negotiated, most lenders treat the two very similarly. I always think it’s important to highlight that whenever I talk about it because I can’t count how many clients I’ve talked to, and to whom I’ve had to explain that their proposal was making it difficult to get an approval - because they were told by the trustee (who gets paid to put people through as many bankruptcies or proposals as possible) that the proposal wouldn’t be a problem for their credit.
Now that we’ve gotten that out of the way, these are the big differences between the two. Although both are ways for you to be discharged of debt, bankruptcies are meant to be fully cleansing, while proposals are meant to provide a way to reduce your liability while still making small payments towards your debt. Both of them are established by trustees, but while in a bankruptcy a trustee simply discharges your debt, in the proposal, they manage your payments and determine how much you can afford.
There are three other big differences. The first is that a consumer proposal, despite what I said before, does still demonstrate at least a minor desire to pay, and though it is better to contact your lenders directly in order to find some sort of compromise, there is a small benefit. This benefit is highlighted also by the fact that consumer proposals disappear 3 years after your final payment has been made under it, while bankruptcies remain there for 7 years. That time difference is a big deal because the smaller amount can be incredibly helpful in restarting your life and credit history. Now, the final difference is that in a consumer proposal you have to continuously make payments. I’ve seen tons of clients who agreed to a proposal, and then found out they couldn’t afford even those payments. That will put a defaulted judgment status on your credit report and it’s probably the worst thing you can ever have on that file. It sends a signal to the lenders that you are very irresponsible with your money. Not only were you unreliable in paying your original creditors, you couldn’t even budget your ability to pay an incredibly small percentage to them… If you are worried about this it’s usually better to go for a full bankruptcy.
The last thing I wanted to say on this topic is that it seems as though any bankruptcy, even if not technically on file, does seem to still be available to the big banks. They get different reports than everybody else, and from what I can tell, getting big-ticket loans for things like houses even decades after a bankruptcy is virtually impossible.
Anyways, I hope all of this has been informative and helps give you all a better idea of what kind of options you have in the worst-case scenario!
By: Mateo Gjinali
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