Consumer Proposals allow a person to avoid bankruptcy while repaying only a portion of his debt. Perhaps 50% or even 30%. Also, assets can be retained that might be lost in a bankruptcy. Consumer Proposals are very popular in Ontario because Ontario has no exemption amount for a home. A consumer proposal often allows a person to retain the home.
Drafting a proposal is an art requiring great skill and an intimate knowledge of the law, creditors and human nature. Trustees in bankruptcy have this skill and can guide you on the terms, amount to offer the creditors and length of the consumer proposal and any special terms.
The rules for filing a Consumer Proposal:
The services of a trustee in bankruptcy must be used;
The consumer proposal must provide more for the creditors than they would receive in a bankruptcy;
The debt must be consumer debt. Therefore businesses cannot file a consumer proposal. however a person who has a sole proprietorship business can file one;
The debt cannot be for more than $250,000, excluding a home mortgage. If the debt is more than $250,00 or a business want to file a Division I Proposal is available.
The consumer proposal cannot be for more than five years;
As soon as a consumer proposal is filed all actions against the debtor, by law, must cease. This includes collection calls, garnishment and any legal action to collect the debt. Interest also stops accruing;
Consumer proposals are considered accepted if, within 45 days of the the filing, a creditor has not objected. If any creditor objects a creditors’ meeting is required;
Creditors vote at the meeting with a simple majority of the dollars voted deciding on acceptance or refusal;
If the consumer proposal is accepted all the creditors, including the ones who voted against the proposal and the ones who did not vote, are bound by the terms of the consumer proposal;
If the consumer proposal is not accepted, the debtor cannot make another consumer proposal;
The debtor is not automatically bankrupt if the consumer proposal is not accepted;
The debtor is required to take two counselling sessions.
Why would the creditors want someone to file a consumer proposal?
Creditors almost always support a consumer proposal because they do not want the person to file bankruptcy as they would receive less money in a bankruptcy.
Division I Proposals.
A Division I proposal is an offer to creditors to accept the terms of the proposal thus having the debtor avoid bankruptcy. The terms in a Division I Proposal are only limited by the drafter’s imagination.
Here are some of the rules:
A Proposal can only be filed through a Trustee in Bankruptcy;
The filing of a Proposal stays all legal actions undertaken or contemplated by unsecured creditors;
Secured creditors are not bound by the terms of a Proposal and therefore must concur in the filing of the Proposal;
The creditors must be better off under a Proposal than under a bankruptcy;
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 and the expected payment to creditors under the proposal compared to what they would receive in a bankruptcy;
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 court must approve the Proposal.
If the Proposal does not receive the required votes, the individual or business 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 individual placed into bankruptcy.