The speed Discharge: Bankruptcy wins over Consumer proposal

In the world of debt relief, two primary options often come to mind: consumer proposals and bankruptcy. While both offer a path to financial freedom, they differ significantly in their implications and long-term effects. This article will argue why bankruptcy, despite its daunting reputation, can often be a more advantageous solution than a consumer proposal for individuals seeking to reestablish their financial footing.

When you’re drowning in debt, the idea of a “consumer proposal” sounds like a gentle breeze, a reasonable compromise. You offer your creditors a portion of what you owe, they agree, and you embark on a multi-year repayment plan. It feels less drastic, less shameful, than declaring bankruptcy. But let’s pull back the curtain on that seemingly gentler option, because from where I’m standing, a consumer proposal often leaves you in financial limbo far longer than the “nuclear option” of bankruptcy.

People shy away from bankruptcy like it’s a scarlet letter, a permanent stain on their financial record. They hear “bankruptcy” and picture endless years of ramen noodles and rejection from every lender on the planet. But what if I told you that in many, many cases, bankruptcy is not just the faster path to a fresh start, but the smarter path?

Let’s talk about the cold, hard facts, because that’s what truly matters when your financial future is on the line.

THE SPEED OF DISCHARGE: BANKRUPTCY WINS, HANDS DOWN

Here’s the first crucial point, and it’s a game-changer: bankruptcy gets discharged sooner. For a first-time bankrupt individual, you’re often looking at a discharge in as little as nine months, provided you fulfill your obligations (like attending two credit counseling sessions and making any surplus income payments). That’s right, nine months! In less than a year, you can be free from the crushing weight of your unsecured debts.

Now, compare that to a consumer proposal. A consumer proposal, by its very nature, is a repayment plan. It typically spans three, four, or even five years. That’s three to five years of making payments, adhering to a strict budget, and constantly having that debt hanging over your head. You’re still actively engaged in paying off a portion of what you owe, stretching out the process and delaying the true feeling of financial liberation.

Think about the psychological impact of that. Nine months versus five years. That’s a lifetime in the world of financial stress. The sooner you’re discharged, the sooner you can truly move on, mentally and emotionally.

CREDIT REESTABLISHMENT: THE MYTH OF THE “LESS DAMAGING” PROPOSAL

This is where the consumer proposal truly falters in the long game. The common belief is that a consumer proposal is “better for your credit” than bankruptcy. And yes, initially, the bankruptcy notation on your credit report might look more severe. But let’s look beyond the surface.

With a bankruptcy, once you’re discharged (again, often within nine months), you can immediately start the process of rebuilding your credit. Your credit report will show the bankruptcy for a period (typically six to seven years from the date of discharge for a first-time bankruptcy), but you can begin demonstrating responsible financial behavior right away. You can obtain a secured credit card, for example, and diligently make your payments, showing lenders that you are a new, reliable borrower. In many cases, people can reestablish a decent credit score within two years post-bankruptcy discharge.

Now, let’s consider the consumer proposal. Your credit report will show the consumer proposal for three years after the proposal is successfully completed. Let that sink in. If your proposal is a five-year plan, you will have that mark on your credit report for a total of eight years! You are effectively in a holding pattern for a far longer period. You cannot truly begin to rebuild your credit until that consumer proposal is paid in full and reported as “completed” by your creditors. Only then does the three-year clock for its removal from your credit report even begin.

So, while bankruptcy’s initial hit might seem harder, its recovery period for reestablishing credit can be significantly shorter. You get to start fresh sooner, making good financial decisions that positively impact your credit score, rather than being stuck in a multi-year repayment cycle that delays your credit recovery.

DEBT ERADICATION: BANKRUPTCY WIPES THE SLATE CLEAN

Here’s the starkest difference, and it’s a fundamental one: bankruptcy wipes out all your unsecured debt. You don’t have to pay anything (beyond any surplus income obligations, if applicable, which are based on your income and household size, not the amount of debt you owe). This is the “fresh start” that bankruptcy truly offers. It’s a complete eradication of the financial burden that has been crushing you.

A consumer proposal, on the other hand, requires you to repay a portion of your debt. While it’s typically a significantly reduced amount compared to what you originally owed, it’s still a repayment obligation. You are still on the hook for a chunk of that debt, extending your financial commitment and delaying the psychological relief that comes with being truly debt-free.

Imagine the difference: waking up one day, nine months after filing, and knowing that your credit cards, lines of credit, and other unsecured debts are simply gone. Compared to waking up five years later, having diligently made payments throughout, and then starting the clock on rebuilding your credit. The emotional and financial freedom of a complete debt wipeout is unparalleled.

THE “EASIER TO GET APPROVED” FALLACY

It’s true that a consumer proposal is generally “easier to get approved” by creditors. This is because they are getting some money back, as opposed to potentially nothing in a bankruptcy scenario. But “easier” doesn’t necessarily mean “better” for you.

Creditors agree to consumer proposals because it’s often their best chance of recovering any funds from a financially distressed individual. It’s a business decision for them. But your financial recovery should be your priority, not theirs.

Don’t let the allure of “easier approval” blind you to the long-term implications. The perceived ease of a consumer proposal can often lead individuals down a path that extends their financial struggles, delays their credit recovery, and keeps them tethered to debt for far longer than necessary.

CONCLUSION: CHOOSE THE SWIFT AND DECISIVE PATH

When facing overwhelming debt, it’s crucial to look beyond the immediate perceptions and understand the long-term realities of your options. While a consumer proposal might seem like a gentler approach, its extended repayment period and delayed credit reestablishment can keep you in financial purgatory for years.

Bankruptcy, despite its initial stigma, offers a swift and decisive path to a true financial fresh start. It wipes out your unsecured debt, allows you to begin rebuilding your credit much sooner, and ultimately liberates you from the shackles of your past financial struggles.

Don’t be afraid of the word “bankruptcy.” Be afraid of staying trapped in a cycle of debt that could be resolved far more efficiently and effectively through the very option you’re being told to avoid. Sometimes, the seemingly harder choice is, in fact, the smart choice.

I hope you will enjoy this article and if you have any questions or would like to discuss I am always available.

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.