How Consumer Proposals Work

How Consumer Proposals Work

How Consumer Proposals Work

The main advantages of how consumer proposals work, are that they allow a person to avoid bankruptcy while paying only a part of what is owed, and retain all their assets, even ones that might be lost in a bankruptcy.   In most cases the payments made, over not more than 5 years, are 50% of what is owed or perhaps only 30%.   Trustee fees are set by the Federal Government and come out of the payments required in the terms of the consumer proposal.   As soon as a consumer proposal is filed all collection action, by law, must stop.   This includes garnishees in place or contemplated.

Consumer proposals can  have you pay off only a portion of your debts;  extend the time you have to pay off the debt; or provide some combination of both.

To be acceptable, your creditors must receive a greater financial benefit under a consumer proposal than a  bankruptcy.

The rules regarding how consumer proposals work are as follows:

• Available to debtors owing consumer or commercial debt amounting to less than $250,000, excluding a mortgage on the principal residence.   If more than $250,000 is owed a Division I Proposal is available (See below);

• Cannot be for a term of more than 5 years;

• Stay of Proceedings is in effect;

• Can only be filed through a trustee in bankruptcy or an administrator of consumer proposals;

• The creditors must be better off under a Proposal than under a bankruptcy;

• Administrator must file a report to the creditors on the affairs of the person and the causes of financial difficulty;

• If no objection to the consumer proposal is received within 45 days of the filing of the consumer proposal it is deemed to have been accepted by the creditors;

• If no objection to the consumer proposal is received within 15 days after the deemed acceptance of the consumer proposal it is deemed to have been approved by the court;

• At the expiration of the forty-five day period following the filing of the consumer proposal, if at that time creditors having in the aggregate at least twenty-five per cent in value of the proven claims have so requested, a meeting is called. The meeting of creditors must be held within twenty-one days after being called;

• Creditors vote at the meeting with a simple majority of the dollars voted deciding on acceptance or refusal of the proposal;

• Once the consumer proposal is approved by the Court it is binding on all creditors, even ones who voted against acceptance or who did not vote;

• Debtor is required to take two counselling sessions;

If the creditors do not accept or the court does not approve the consumer proposal the debtor cannot make another consumer proposal;

The debtor is not automatically bankrupt if the consumer proposal is not accepted.

Other Proposals or Division I Proposals

There is no restriction on the amount a person owes. He can owe less or more than $250,000 to be eligible.  If the creditors do not accept the Proposal the person is automatically bankrupt effective on the date of the Creditors’ Meeting or the date the court rejected the Proposal.  If the proposal is accepted counselling is not required.

Whaat is a Division I Proposal?

A proposal is simply an agreement between a person and his creditors whereby the person pays only a portion of his debts (Say one-half), thus avoiding bankruptcy. A proposal is made to the creditors through a trustee. If the creditors vote in favour of the proposal, and the court approves it, then the proposal is a binding contract which all creditors must accept even the creditors who did not vote for the proposal. If the creditors vote against the proposal then the person is bankrupt.


Meeting of creditors to consider the Division I Proposal

• Creditors vote on the Proposal, in person or by mail, at a creditors’ meeting held approximately three weeks after the Proposal is filed;

• The trustee must file a report to the creditors on the affairs of the person and the causes of financial difficulty;

• In order to be accepted by the creditors, the Proposal must receive approval by at least 66.6% (2/3) in dollars and 50% plus one in number of eligible creditors who vote. The Proposal must then be approved by the Court;

• If the Proposal does not receive the required votes, the individual is immediately bankrupt effective on the date of the creditors meeting;

• Once the Proposal is approved by the Court then all unsecured creditors are bound by the Proposal; not just the creditors who voted in favour of the Proposal;

• If the terms of the Proposal are not honoured, then the trustee or a creditor may apply to Court for the Proposal to be annulled and the company placed into bankruptcy.

Reasons why a personal proposal may be better than a bankruptcy

Proposals must provide a better result to creditors than a bankruptcy. Otherwise, there is no reason for creditors to vote in favour of the Proposal. Note, however, that a “better” result can stem from a quicker distribution, lower costs of administration and a certain outcome of issues that may otherwise be contentious.

Proposals are particularly useful in the following situations:

• Where the insolvent desires a “certain” result or a quick resolution and is prepared to pay a premium to achieve that result;

• Where discharge is likely to be contentious or a substantial condition is likely to be imposed;

• Where the insolvent finds bankruptcy unacceptable;

• Where the insolvent wishes to continue in business and will be prevented from so doing if obliged to disclose that he is a bankrupt when dealing with third parties;

• Where professional accreditation may be lost or put at risk by a bankruptcy;

• Where a bankruptcy will result in a secured creditor acting on its security;

• Where the insolvent wishes to retain some key asset (e.g. a home, heirloom, secret process or impending inheritance);

• Where the insolvent has previously been bankrupt.


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