What Happens to Your Assets in a Consumer Proposal vs Bankruptcy?

When faced with overwhelming debt, individuals often consider two primary options to regain financial stability: a consumer proposal and bankruptcy. Both are designed to provide relief from creditors and help individuals get a fresh start. However, the way each option affects your assets differs significantly. Understanding the nuances between a consumer proposal vs bankruptcy is crucial for making an informed decision that aligns with your financial goals and circumstances.

In this blog, we’ll break down how your assets are treated in both a consumer proposal vs bankruptcy, helping you understand the impact of each choice on your personal property and wealth.

The Basics of a Consumer Proposal and Bankruptcy

Before we dive into the specifics of asset protection, let’s first clarify what a consumer proposal and bankruptcy are.

• Consumer Proposal: This is a legally binding arrangement between you and your creditors, where you offer to repay a portion of your debts over a set period, typically up to five years. The proposal must be approved by the creditors and the court. Once completed, the remaining debt is forgiven.

• Bankruptcy: This is the legal process of discharging most of your debts after surrendering some of your assets to a licensed bankruptcy trustee. It typically involves a more drastic approach to debt relief and may take several years to fully discharge all debts.

Now, let’s examine how assets are affected in each scenario.

What Happens to Your Assets in a Consumer Proposal?

One of the major advantages of a consumer proposal vs bankruptcy is that your assets are generally protected. In a consumer proposal, your assets are typically not at risk, meaning you don’t have to sell off valuable property to settle your debts.

1. Protecting Your Property

In a consumer proposal, the goal is to make an affordable repayment offer to creditors without having to give up your assets. This means you can keep your home, car, and other personal property, provided you are not in arrears or facing financial difficulty with these assets. As long as you can maintain your payments according to the proposal terms, you retain ownership of your property.

2. Exempt Assets

Certain assets may be exempt from seizure under a consumer proposal. These exemptions depend on the laws in your province but usually include basic household items, tools for your trade, and a portion of the equity in your home. As long as your assets fall within these limits, they are safe from creditors.

3. Debt Reduction Without Liquidation

The consumer proposal allows you to pay only a portion of your debt, typically a fraction of what you owe, and have the remaining balance forgiven. This makes it an attractive option for those who don’t want to lose their assets but still need relief from debt.

What Happens to Your Assets in Bankruptcy?

In contrast to a consumer proposal, bankruptcy involves a more invasive process that could result in the loss of some of your assets. Here’s what you need to know:

1. Asset Seizure

In bankruptcy, your assets may be seized and sold by a licensed trustee to pay off your creditors. The trustee will evaluate the value of your assets and sell anything that is not exempt under provincial law. For example, if you have significant equity in your home or own valuable items such as luxury cars or expensive collectibles, these could be sold in order to pay creditors.

2. Exemptions

While bankruptcy does allow for the liquidation of assets, each province has specific exemptions that protect certain property. These exemptions typically cover basic needs, such as clothing, tools of the trade, and a portion of the equity in your home, depending on your location. However, if your equity exceeds the exempt amount, you may be required to either pay that equity amount to the trustee or surrender the asset.

3. Impact on Your Home

If you own a home with significant equity and file for bankruptcy, there is a possibility that the home may need to be sold to cover debts. However, in certain cases, you may be able to retain your home by making an arrangement with the trustee to pay out the equity amount.

4. Secured Debts

Secured debts, such as mortgages or car loans, are generally not discharged in bankruptcy. If you have a mortgage on your home or a car loan, you’ll need to continue making payments or risk losing the property. Bankruptcy doesn’t affect these types of loans unless you voluntarily surrender the property.

Key Differences in Asset Protection

When it comes to protecting your assets, the most significant difference between consumer proposal vs bankruptcy is the degree to which your property is at risk. With a consumer proposal, you can usually keep all your assets, as long as they don’t exceed certain exemption limits. In contrast, bankruptcy may require you to surrender some of your assets in exchange for a fresh financial start.

Conclusion

Deciding between a consumer proposal vs bankruptcy is not always straightforward, and understanding how each option affects your assets is critical. A consumer proposal offers a less intrusive method of debt relief, allowing you to keep your property while reducing your debts. On the other hand, bankruptcy may involve the sale of assets to repay creditors, though exemptions can protect certain property.