Personal Proposals. Consumer Proposals and Division I Proposals.

Under the Bankruptcy and Insolvency Act, a trustee or an administrator files a Proposal or an arrangement between you and your creditors to 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 be better off under a Proposal than if you go bankrupt.

There are two types of Proposals an individual can file:

1 - CONSUMER PROPOSAL

Available to debtors owing only consumer debt amounting to less than $75,000, excluding a mortgage on the principal residence;

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;

Any dissent to the consumer proposal, received prior to 45 days of the filing is deemed to be a request for a creditors’ meeting;

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

Debtor is required to take two counselling sessions; (This requirement has been overturned by the courts. The new bankruptcy law passed on November 25, 2005 that will not be enacted until June 30, 2006 at the earliest, makes this a requirement again. Section 66.38 of the BIA.)

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.

2 - OTHER PROPOSALS OR DIVISION ONE PROPOSALS

There is no restriction on the amount a person owes. He can owe less or more than $75,000 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.

WHAT IS A DIVISION 1 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.

Proposals are a better deal for the creditors than bankruptcy and in the vast majority of cases are accepted!

"A Proposal is a contract between a debtor and his creditors. It settles the creditors' rights if there are differences in priorities or treatment amongst them. It becomes a binding contract to that extent amongst the creditors themselves. They enter into the contract by voting on it and either assenting to it or defeating it."

From the Ontario Supreme Court decision in Re Sefel (1989) 76 C.B.R. (N.S.) 48.

Filing a Proposal has a number of immediate advantages for an individual under siege by his creditors:

The filing of a Proposal stops all legal actions undertaken or contemplated by unsecured creditors.

The filing of a Proposal gives the debtor some "breathing space" so that he can approach the creditors and explain his financial situation and ask for support.

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 debtor and causes of the financial difficulties. The trustee must also present to the creditors his estimate of what the creditors would realize under a bankruptcy as compared with the amount they are being offered under the Proposal. In order for the Proposal to be justified, the creditors must be better off under the Proposal than they would be under 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, and the Proposal must be approved by the Court. If the Proposal is accepted by the creditors and 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 Proposal does not receive the required votes the debtor is immediately bankrupt effective on the date of the creditors' meeting.

FILING A DIVISION I PROPOSAL UNDER THE BANKRUPTCY AND INSOLVENCY ACT

-- KEY CONSIDERATIONS --

A Proposal can only be filed through a Trustee in Bankruptcy.

A Proposal is simply an agreement between the debtor and his creditors.

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.

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 A BETTER CHOICE THAN 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.