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division 1 proposal Ontario

Businesses today are dealing with all sorts of pressures. If you run a corporation, you might be facing cost increases, reduced revenue, labour shortages, higher wages and higher interest rates on your debt.

What can you do if your debt payments are too difficult to manage but you don’t want to file for Bankruptcy? An alternative to making your debt manageable and avoiding Bankruptcy is filing a Division 1 Proposal in Ontario.

Division 1 and Division 2 Proposals

Both corporations and individuals use secured and unsecured credit to help buy things they need. And at some point, credit has to be used to manage day-to-day expenses. If you run a corporation, you might use unsecured credit to meet payroll and purchase items necessary to produce the items you sell. Credit often bridges the gap between when bills are due and when you receive customer payments.

Debts can increase quickly. You can find yourself in a situation where you have significant credit payments but not enough income to pay them. So, what can you do? Filing for corporate Bankruptcy is an option, but you could lose assets and have to close your business. It will take time to rebuild your credit rating. You may want to consider a Division 1 or Division 2 Proposal in Ontario.

Division 1 Proposal in Ontario

A Division 1 Proposal in Ontario is also known as a Corporate Proposal. The Bankruptcy and Insolvency Act (BIA) governs this legal process. A Division 1 Proposal in Ontario aims to allow corporations with more unsecured debt than they can pay to avoid filing for Bankruptcy. Unsecured debt includes lines of credit, credit cards, unsecured loans, payday loans, and other debts.

Eligibility for a Division 1 Proposal

To file a Division 1 Proposal, you must meet the following criteria:

  • Your corporation must be insolvent, meaning it doesn’t have the money to make its credit payments as they come due.
  • The corporation’s unsecured debt is $250,000 or more.
  • If the corporation has less than $250,000 in unsecured debt but the structure of the corporation is complex, it can file a Division 1 Proposal.

Individuals can file a Division 1 Proposal, too, but their unsecured debt must exceed $250,000. The rules that apply to corporations for a Division 1 Proposal also apply to individuals.

How can a Division 1 Proposal help?

Corporations that can’t pay their debts as they come due can incur extra interest and fees, causing their debt to grow. They may get harassing collection calls. Their creditors may threaten legal action. Sometimes, they may have to file for Bankruptcy because the corporation can’t pay its bills and continue operations.

A Division 1 Proposal in Ontario aims to help your corporation avoid business Bankruptcy and get back on track. It is an agreement negotiated with your creditors to reduce the debt you owe and make your payments manageable.

It can allow you more time to repay the amount you owe by extending your term. It will also stop collection calls and any legal action your creditors may have initiated.

How do I file a Division 1 Proposal?

Here are the steps you need to take to file:

  • Contact a Licensed Insolvency Trustee (LIT) and set up an appointment.
  • Your LIT will work with you to find the best debt solution.
  • If a Division 1 Proposal is the right solution, your LIT will file a Notice Of Intent (NOI) with the Office of the Superintendent of Bankruptcy (OSB).
  • The NOI notifies your creditors that you will be filing a Division 1 Proposal but gives the LIT more time to prepare the Proposal.
  • Once your LIT files the NOI, you have the same protections from your creditors that filing a Division 1 Proposal allows. Your LIT has 30 days to file the Division 1 Proposal unless the court extends the deadline.
  • The creditors vote to accept or reject the Proposal.
  • If 50% of your creditors, who hold two-thirds or more of the dollar value of your debt, vote to accept the Proposal, it then goes to the court for final approval.
  • You begin making payments to your LIT once the Proposal is accepted and approved.

One significant difference between a Division 1 and a Division 2 Proposal is the court’s role. If the court rejects a Division 1 Proposal, the debtor is placed in Bankruptcy immediately. There is no opportunity to renegotiate the Proposal. To avoid this, you and your LIT must make the best offer possible the first time.

With a Division 2 Proposal, the court is not involved. If your creditors reject it, you can try to settle directly with your creditors or file for Bankruptcy.

What happens after you file a Division 1 Proposal?

Filing a Proposal won’t make your debts disappear, but it will be much easier for you or your corporation to manage. You may have less debt or longer to pay off your debts. Or, you may have both. Of course, you’ll have to fulfill all the obligations of the Proposal you agreed to, including:

  • Disclosing all required information to your LIT
  • Make your payments to your LIT as agreed so your LIT can distribute the money to your creditors
  • Attend the meeting of your creditors

Your payment plan can take up to five years, but you can pay it off early. You may find that once your Proposal gets your debts under control, you’ll have more money available to put toward your Proposal.

Whether you pay off your Proposal early or take the full five years, you’ll be out of debt once you have fulfilled your obligations. You’ll start fresh and can focus on rebuilding your credit and company.

Is a corporate restructure better than a Division 1 Proposal?

It’s understandable that, as a business, you want to avoid a corporate Proposal or corporate Bankruptcy. Businesses sometimes consider corporate restructuring as an alternative.

Companies often use corporate restructuring to reassess their operations. cash flow and management structure. The goal could be to increase its earnings, reduce its costs, or put itself in a better competitive position.

Corporate restructuring can address debts as well. If the corporation’s restructuring process is informal, the company has no legal protection from its creditors. It’s an agreement negotiated between the company and its creditors. So, its creditors can pursue the company to collect the money it owes or take the company to court if they choose to do so.

A formal corporate restructuring will protect the business from collections and legal activity by its creditors. This is because a formal restructuring is part of a Division 1 Proposal. Legal action and collection activities stop after the Proposal is filed with the Office of the Superintendent of Bankruptcy.

What if I don’t qualify for a Division 1 Proposal in Ontario?

If you or your business have more debt than you can handle but don’t fit the criteria for a Division 1 Proposal, you might find debt relief with a Division 2 Proposal. A Division 2 Proposal is commonly known as a Consumer Proposal.

If you have a business and are a sole proprietor, you and your business are considered one and the same. Therefore, you can consider filing a Consumer Proposal. The following chart details the main differences between the two.

Debt Relief OptionDivision 1 Proposal
(Corporate Proposal)
Division 2 Proposal
(Consumer Proposal)
Who can fileCorporations, individuals, an estate trustee of a bankrupt who is deceased, a bankrupt.Consumer Proposals are only for individuals, including sole proprietors.
What is the dollar limit?Division 1 Proposals are for debts exceeding $250,000.Consumer Proposals are for individuals who owe less than $250,000.
Do I need to provide financial statements to my creditors?Yes. The LIT must include your projected cash flow statement with the Proposal.No.
How long do creditors have to accept or reject the Proposal once it’s filed?Up to 21 days.Up to 45 days.
What happens if the creditors reject the Proposal?You are placed into Bankruptcy automatically if your Proposal is rejected.You can try to settle directly with your creditors or file for Bankruptcy.
Do I need to attend counselling sessions?No.You must attend two counselling sessions.
How long does it take to pay it off?Five years is the usual time frame, but it can vary. You can pay it off early if you have the funds.Typically, between one-five years with the option to pay it off early.
What happens if I can’t make my payments?If you fail to make your payments and default, you won’t have legal protection from creditors. They have the legal right to pursue you for the money you owe them.miss three payments. Then, your creditors can pursue you for the money you owe them.

How to Make the Best Choice

Solutions are available whether your debt results from business or personal expenses. You don’t need to carry this burden on your own. Our team of Licensed Insolvency Trustees at Adamson and Associates will work with you to find the best options for dealing with your debt.

We provide credit counselling, Consumer Proposals, Division 1 Proposals and Bankruptcy to give you a clean slate so you can start fresh. Please reach out to us today at 519-310-5646 for a free consultation. We’ll work with you to get rid of your debt so you can get back to living your life.

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