You’ve gotten into debt that you can’t pay back. Your credit cards are maxed out and you can barely keep up with the interest payments and penalties, you owe money to utilities companies, or you’ve gotten stuck in a cycle of owing money to payday loan companies.
There are many ways to become insolvent and many reasons why it happens. There’s no reason to be ashamed of any of them. Instead of struggling to keep up with impossible debt repayments, it may be time to consider insolvency.
If you are insolvent, two processes for relief from unsecured debt become available to you. Both bankruptcy and a consumer proposal will excuse you from a potentially large portion of your unsecured debt after you have paid a portion of it. This can either be done through:
- a) Selling assets or equity in assets, as in a bankruptcy, or
- b) Making fixed monthly payments without interest on an agreed-upon reduced amount, as in a consumer proposal.
Those are the basic differences, but you may want further bankruptcy vs consumer proposal insights from a bankruptcy trustee, i.e., Licensed Insolvency trustee.
What Bankruptcy Does to Your Credit Report
The first bankruptcy will remain on your credit report for six to seven years, whereas a consumer proposal will remain on your credit report for three years after completion. Because consumer proposals can last up to five years, a bankruptcy may clear sooner depending on the length of the proposal.
However, a second bankruptcy will be on your credit report for 14 years. A second proposal will only be on your credit report for 3 years after it is completed. Bankruptcy has a cumulative effect on your credit report, proposals do not.
What Bankruptcy Means for Additional Income
In a bankruptcy, you may wind up having to pay a portion of additional income to your creditors. If you get a raise, an inheritance, or start another job, you might wind up having to give a percentage of additional income to your creditors.
If you expect to earn more income while you are going through the insolvency process, a bankruptcy trustee at a firm like David Sklar & Associates can guide you through your alternatives, such as a consumer proposal. In a consumer proposal, you pay a fixed amount every month regardless of any increases to your income.
How Bankruptcy Affects Future Employment
Bankruptcy may hurt your chances of future employment if that job requires you to be bonded. This is insurance for the employer for a number of jobs in which employees are entrusted with sensitive positions, often handling or in proximity to cash and valuables. Some jobs that may require being bonded include:
- Employees who work inside clients’ homes such as technicians or cleaners.
- Employees in accounting departments or officers in a position to embezzle.
- Any employee who routinely handles large amounts of cash or valuables
It may be harder to qualify for a fidelity bond if you have declared bankruptcy in the past. By comparison, a consumer proposal is not considered a bankruptcy and you do not have to answer “yes” when asked on an application form if you have ever been bankrupt.
Before you take any steps in the insolvency process, talk to a bankruptcy trustee that can help you decide which process is better for you.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.