Bankruptcy Vs. Proposal: Choosing the Right Option

Statistics

Many individuals in financial difficulty often face the choice of whether to make a proposal to their creditors or file for bankruptcy as a means of dealing with their debts. While the percentage of proposals filed in Canada and B.C. is still considerably less than the number of bankruptcies filed each year, the number and percentage are both increasing steadily.

The following are the number of consumer bankruptcies versus consumer proposals filed in Canada and B.C. during 2007:

	Canada	B.C.
Consumer Bankruptcies	79,796	6,650

Consumer Proposals	19,486	1,141

Total	99,282	7,791

Percentage of Proposals Filed	19.6%	14.6%

(See Bankruptcy - Insolvency Statistics and Economic Analysis for further data and statistics on bankruptcies versus proposals.)

Regardless of the number of bankruptcies or proposals filed, each individual must make their own choice. Depending on your particular circumstances, there are a number of key factors to possibly consider in choosing between these two options.

Considerations in choosing a proposal

In general, for a proposal to be "viable"it should provide a "better" outcome for creditors than under a bankruptcy scenario thus encouraging the creditors to vote in favour of it. It should also have terms that you can reasonably manage to maintain. Assuming a proposal is viable, it can have the following advantages:

It can provide for a more certain result, such as a fixed payment amount to be paid over a fixed period of time. The required payments do not necessarily vary depending on your future income levels, as they do in a bankruptcy;
It can provide a quick settlement of the debts in cases where an asset is liquidated to pay creditors or a lump sum payment is made by a third party. Even where a fixed payment term is agreed to, you can make the proposal payments earlier than scheduled and thus complete your proposal sooner;
It can eliminate the need for a court hearing for your bankruptcy discharge which may be contentious or where a substantial condition is likely to be imposed;
It can sometimes allow for a binding overall debt settlement to be achieved even though you may have a few creditors (less than 50% in dollar value of claims) who are not likely to be in favour of it;
It can allow an insolvent person to continue to own and operate a limited company or other business operation that might otherwise have to be discontinued under a bankruptcy scenario;
It can allow an insolvent person to maintain a professional accreditation that might otherwise be lost or put at risk by a bankruptcy;
It is more likely to have little or no impact on your ongoing relationship with secured creditors than a bankruptcy filing may have;
It can often allow you to retain some key asset (e.g. a home, heirloom, patented process or impending inheritance) as long as the proposal is still considered to be a better result for creditors;
It can avoid the negative implications of a second or multiple bankruptcies;
It is likely to have less impact on your credit rating and your ability to obtain credit in future; and,
It is preferable where the insolvent person views a bankruptcy as an unacceptable choice.

Considerations in choosing a bankruptcy

If you can make a viable proposal to your creditors, this is generally a preferable option to a bankruptcy. However, having little or no income often leaves bankruptcy as the only logical choice. Nonetheless, there are some other circumstances where a bankruptcy may still be the more appropriate option:

Where you have a steady monthly income but also have a number of dependents or have high non discretionary expenses such as necessary health costs or support payments. In general, it is usually necessary to have some level of steady surplus income in order to ensure a proposal can be completed;
Where your income is highly variable or seasonal. It may be difficult to commit to a lengthy series of monthly payments ( e.g. 3 to 5 years ) where your employment or earnings level is highly uncertain; and,
Where one or more large voting creditors are not likely to vote in favour of any proposal you can offer. Although the decision of how much to offer creditors will be yours to make, the trustee can advise you as to the likely required payment percentage you need to offer in order to have the proposal accepted. There may also be some creditors, such as Canada Revenue Agency, that require particular considerations.