This a first of a series of articles on comparisons between a bankruptcy and proposal. Sometimes it can appear that bankruptcy would much quicker than a proposal but take a look at this article - you will see there are a lot of factors that determine the duration of a bankruptcy that you should be aware of.
When it comes to paying off your debts, the quicker you can be done with it the better, right? At first glance, it seems like bankruptcy would be the swifter way to go, but the actual term of each option isn’t as cut and dry as you might think. Here’s a breakdown of what you can expect with both options.
When you file for bankruptcy, there is a minimum duration that is determined by two things: your surplus income and how many times you have filed for bankruptcy.
Surplus income isn’t determined by how much unspent money you have at the end of the month. It’s actually a result of a calculation using your income and a set amount determined by the government based on income and the number of people in the household. Learn more about surplus income here.
If you’ve filed for bankruptcy before, it will impact your minimum term as follows:
No surplus income: minimum 9-month term
Surplus income: min. 21-month term
No surplus income: min. 24-month term
Surplus income: min. 36-month term
Must go to court for discharge
Generally the minimum term of the bankruptcy is 9, 21, 24 or 36 months. You cannot shorten the term of the bankruptcy, but it can get extended if your actual income increases and you are unable to pay the required amount during the minimum term, or if your duties have not been completed on time.
If you file for bankruptcy you must complete, at a minimum, the following:
- File a report with your Trustee detailing your income and your expenses each month;
- Pay any surplus income owing, depending on the income actually earned during the term of the bankruptcy;
- Provide your Trustee with your income tax information for the year of your bankruptcy; and,
- Attend two counselling sessions.
As your minimum term is coming to an end, your Trustee will review your file. If you have completed everything required of you, the Trustee can grant you an automatic discharge from your bankruptcy, and you will be released from your obligation to pay your debts.
If you have not completed all your duties on time, the Trustee will oppose your automatic discharge and make an application to court to have your discharge reviewed by the registrar.
Wait times for court dates, multiple court dates and possible additional duties can add several months to your term.So what started out as a 9, 21, 24, or 36-month process has now become significantly longer.
In summary, you are required to stay in bankruptcy for the entire minimum term of 9, 21, 24, or 36 months in length. If you are diligently making payments and doing your duties, your minimum will also be your maximum. If you are not diligent, the term will be extended and can be postponed indefinitely until your trustee is satisfied you have completed all the duties.
A proposal is a new payment arrangement you propose to your creditors. Sometimes the new arrangement acts as a consolidation of all your debts into one payment, or it can be a compromise or reduction of the total amount owing.
The term of the proposal is impacted by two things:
- The amount your creditors are offered in a proposal must be more than in what they would receive in a bankruptcy
A proposal must always offer more money to the creditors than a bankruptcy and is usually three to five years in length.
A proposal is set and fixed from the beginning – there are no interest charges or unexpected fees to impact the monthly payment or, ultimately, the term of the proposal. A proposal must be completed within the initial time period set but can be completed early with no penalties.
- The monthly payment you can afford, taking into consideration your budget and its restrictions
Once we have determined the proposal amount we can work with you to create your own unique budget that sets up an achievable schedule for payments.
One big benefit of a proposal is that, once your creditors have accepted the proposal, the monthly payment will not change regardless of changes in income. So if your actual income turns out to be higher than projected, it doesn’t impact the amount you need to pay into the proposal or the term of the proposal.
On the flip side, if your income decreases, your proposal payment also stays the same. So it’s important to be realistic about your anticipated income and impacts on that income, so we can ensure the proposal payments are maintainable over the term.
- If your surplus income has increased, the term of your bankruptcy can be extended until all funds have been paid;
- You must remain in bankruptcy for a minimum period of time, regardless of whether you are compliant with your obligations or not.
- Your bankruptcy will be delayed until all duties have been completed and an application to court can be made.
- The amount owing is fixed, regardless of changes in your income – the maximum term of the proposal is set but there is no minimum number of months you must be in a proposal;
- If you get a raise, a second job or work overtime, any additional income will provide you with the opportunity to pay off your proposal faster, thereby reducing the term of your proposal.
In summary, while at a glance the proposal appears to be the more time intensive option for resolving your financial difficulties, there are other factors that can impact that comparison.
Rebecca Frederick, CIRP, Trustee in Bankruptcy