Bankruptcy Versus Consumer Proposal – Part two of a Series

by Joel Sandwith on November 15, 2010

Last week I posted the first of a series of blogs that will show the differences between consumer proposals and personal bankruptcies.  If you are experiencing financial difficulty, either of these options may be helpful to you.  These articles are intended to shed a little light on each of them for you – but make sure that you contact us if you’d like a more specific evaluation of your situation.

Today we look at how ‘assets’ are handled in both of these situations. 

If you file a personal bankruptcy, everything you own ‘vests in’ or becomes property of the bankruptcy trustee, for the benefit of all of your creditors.  This sounds a little scary, but don’t worry, you won’t lose everything if you file bankruptcy.  In Ontario, there are certain ‘exemptions’, values of stuff you own, that are protected.  For example, you can keep up to $11,300 of household goods such as electronics and furniture, and a car valued at up to $5650 is also exempt – and these are the resale values, not what it would cost you to replace them. 

Also, if you are making payments on something, like a house or car, that may protect it as well.  For example, say your house is worth $150,000 and you owe $150,000 on the mortgage – since there’s no ‘equity’ in the house, as long as you keep paying the mortgage you can keep the house.  Most pension plans, many insurance policies and even RRSP contributions from more than 12 months ago are protected as well. 

But what if something is not protected?  For example, what if you have an RESP, or a fully paid for car worth $5000 more than the exemption limit?  Or, what if you have real equity in your house?  Unfortunately in a personal bankruptcy you would risk losing those things, or having to pay your trustee to repurchase them.   In some cases, it will be well worth it, but in others it might be difficult or impossible.  So, what is the alternative?

Well, in a consumer proposal the idea is at least in part that you keep your assets.  We write a lot about consumer proposals because of the flexibility they offer – and dealing with assets is one area of flexiblity.  In a consumer proposal, you are offering to pay back part of your debt – in some cases the amount you pay in a consumer proposal can be as little as 33% or 33 cents for each dollar you owe now.  Also, you can make the proposal be as long as five years.  Your creditors get to vote on your proposal, and if they accept it, and you make all of the payments you have agreed to, your creditors will waive the balance. 

One of the factors that creditors look at when voting is your assets.  They’d rather you keep them, but they do want to make sure they are getting a fair deal.  One measurement they use is ‘how much would I get if this person filed a bankruptcy?’  So, they want to know what your assets are.  If your offer to them is as good or better than what they could get in a bankruptcy, that may influence them into accepting your offer.  At the end of the day, a properly constructed consumer proposal will not only save you money, but will protect your assets as well.

To get a better idea of which of these options is a good fit for you, please call us toll free at 310-PLAN (7526) – no area code required, or locally here In Sarnia at 519-344-1058.

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