519-646-2222Proposal or Bankruptcy
A pivotal decision people face when dealing with debt challenges is whether to choose a proposal or bankruptcy. Too often, emotions drive this choice rather than logic. Licensed Insolvency Trustees, being rules-driven, tend to approach these challenges with less emotion.
Proposals can feel like a mixed bag. At first, there’s usually immediate relief—one day you’re meeting with an LIT, the next you’ve signed on, and you suddenly have a viable solution for your creditors. This can happen quickly; in some cases, the consultation, application, and sign-up are completed all at once.
The harder part comes later, when month after month for five years you must make the same payment. This can feel more tedious than the “one, two skip a few” rhythm of minimum credit card payments. At this stage, some people start to reconsider their decision.
We’ve had clients return asking about bankruptcy. A first-time bankruptcy usually lasts only nine to twenty-one months. However, if you have surplus income, the payments can be much higher than those under a proposal, which makes them harder to manage.
Because of this, the shorter term of bankruptcy may not always be a real advantage compared to the longer proposal. Proposals can often be paid off early, while bankruptcies can sometimes be extended if the court requires surplus income payments for an additional year.
It comes down to choosing between higher payments for a shorter period or easier cash flow over a longer term.
Proposals offer clear advantages, particularly around cash flow. They also help you build the habit of making regular payments, teaching you to manage your finances without that money sitting in your account. Once the proposal ends, it’s easy to redirect the former payment into savings, a GIC, or investments.
Bankruptcy payments can also encourage savings habits, but the shorter timeframe means the reinforcement is weaker. Habits formed over five years tend to stick more strongly than those formed in under two.
Fortunately, if you regret your choice, it’s possible to switch. You can move from a proposal to a bankruptcy or from a bankruptcy to a proposal. There are, however, important nuances. If you switch from bankruptcy to proposal, you can’t include new creditors. But if you switch from proposal to bankruptcy, you can include new debts.
You cannot file a bankruptcy on top of another bankruptcy, nor can you add a new proposal for debt incurred after an existing one is in place. For example, if you have an undischarged bankruptcy from twenty years ago, it must be discharged before you can file again.
The inability to stack proposals may seem illogical. After all, if banks continue lending to people under insolvency proceedings—despite knowing repayment isn’t possible in the normal course—it seems only fair that some form of recourse should exist for debtors as well.