Key Takeaways
Yes, you can alternate between a consumer proposal and bankruptcy, but it is recommended to first speak with your Licensed Insolvency Trustee to look at the benefits and the potential risks.
Are you wondering whether you can switch between bankruptcy and a consumer proposal in Canada? Or you may be considering changing Licensed Insolvency Trustees mid-process. This article will provide you with a comprehensive explanation of these financial scenarios.
Bankruptcy and Consumer Proposal: An Overview
Bankruptcy and consumer proposal are two legal measures offered under Canada's Bankruptcy & Insolvency Act to help individuals overcome significant debt. The choice between the two largely depends on the debtor's circumstances when filing. However, it's critical to understand what happens if your financial situation changes during the process.
When Can You Go From a Consumer Proposal to Bankruptcy?
Yes, it's possible to change from a consumer proposal to bankruptcy, but it's essential to understand why and if it's the right solution for you. Cancelling a consumer proposal is as crucial a decision as filing it initially.
If you're unable to keep up with your consumer proposal payments due to a change in circumstances, you have three options:
Reschedule, postpone up to two payments: This could be a viable solution if your financial hardship is temporary. However, if you fall three months behind, your proposal is automatically annulled, allowing your creditors to pursue the full amount plus interest since you signed the proposal.
Amend the terms of your original proposal: If your financial situation has changed permanently (due to job loss, divorce, injury, etc.), you can submit a new amended proposal to your creditors to lower your monthly payment for the remaining term. However, this comes with risk, as a rejection from your creditors will automatically annul the original proposal.
Switch to bankruptcy: If you're unable to make proposal payments, bankruptcy could be your best solution. Your trustee can explain this option in more detail, including if new debt acquired since your proposal's start can be included in your bankruptcy. You can do this during or after your consumer proposal has failed.
Can You Go From Bankruptcy to a Consumer Proposal?
If your financial circumstances change, you can transition from bankruptcy to a consumer proposal. For instance, a promotion or change in job, inheritance, or other windfall could generate additional surplus income payments during your bankruptcy.
In these situations, you have a couple of options:
Continue with your bankruptcy - continue to make any required new surplus income payments to the Licensed Insolvency Trustee.
File a consumer proposal while still bankrupt: You'll need to discuss with your Trustee what terms to offer your creditors. Any increase in income or lump sum receipts must be disclosed to your creditors, potentially impacting their expectations in a proposal. However, a proposal allows you to keep any assets you may inherit and extend the payment terms with a lower monthly payment.
Can You Change Licensed Insolvency Trustees?
You cannot switch trustees during a bankruptcy or a consumer proposal. However, if you filed a bankruptcy or proposal with another Licensed Insolvency Trustee, you can switch to a different trustee for your second filing.
Can a Bankrupt Individual File a Consumer Proposal?
If you have filed for bankruptcy before, you can file a consumer proposal for new debts as long as you have been discharged from the prior bankruptcy. If unsure, speak with a Licensed Insolvency Trustee who can confirm you have completed your previous bankruptcy.
Benefits of a Consumer Proposal
There are several advantages to making a Consumer Proposal, including:
Keep all of your assets (in most cases);
The ability to continue as a company's director;
Less severe impact on your credit rating compared to bankruptcy;
Fixed monthly payments that don't vary with income; and
The flexibility to complete the Consumer Proposal in less than five years by adjusting payments.
Challenges of Filing a Consumer Proposal
Before deciding to make a Consumer Proposal, consider the following potential challenges:
The dividend distribution to creditors should be greater in a consumer proposal than what they would receive in bankruptcy; and
Determine whether a consumer proposal is a manageable and affordable option, as five years can be a long time.
Conclusion
Understanding the intricacies of transitioning between a bankruptcy and a consumer proposal is crucial. Remember to consider your financial circumstances, the potential benefits, and the challenges before deciding.
If you are considering a consumer proposal or bankruptcy, the Litvack Group would be happy to have a Free Consultation to discuss your financial circumstances and review your options. Contact us today!