Making Sense of Debt Settlement Proposals: A Look at Consumer Proposal Vs. Division I Proposal to Creditors
Dealing with debts can be overwhelming, particularly when the amount owed is substantial. Thankfully, there are legal alternatives to bankruptcy that allow individuals and corporations to negotiate a repayment plan with their creditors. In Canada, under the Bankruptcy and Insolvency Act (BIA), these are known as Consumer Proposal and Division I Proposal to Creditors. Let’s dive deeper into these two options.
Understanding Proposals to Creditors
A proposal to creditors is a formal agreement between a debtor and their creditors. This agreement allows the debtor to repay only a portion of their debts, offering creditors a better return than they would receive under a bankruptcy scenario.
As the saying goes, “something is better than nothing”, which is why creditors are open to considering such proposals. Now, let’s explore the two types of proposals available under the BIA in Canada.
Highlighting the Two Types of Proposals
Consumer Proposal: A Solution for Individuals with Debts up to $250,000
Introduced to the BIA in 1992, a Consumer Proposal is designed to help individuals manage personal debts. This option is available to those whose debts (excluding their primary residence mortgage) do not exceed $250,000. For couples jointly filing a consumer proposal, the maximum allowable debt is $500,000, excluding mortgages. If the total debt surpasses these limits, the debtor is not eligible to file a consumer proposal.
Division I Proposal: An Option for Corporations and Individuals
A Division I Proposal is a legal procedure under the BIA that allows both individuals and corporations to restructure their debts. Individuals with under $250,000 debt can choose to file a Division I proposal, although most opt for a consumer proposal due to the complexity and cost associated with Division I.
Distinguishing Between a Consumer Proposal and Division I Proposal
While both proposals offer a stay of proceedings to halt creditor actions and remove unsecured debts, they have distinct differences:
Flexibility in case of rejection: In a consumer proposal, if creditors reject the terms, the debtor is not automatically deemed bankrupt. Instead, they can renegotiate with creditors. However, if a Division I proposal is rejected, bankruptcy is automatic.
Voting Threshold: A consumer proposal needs a simple majority in dollars of creditors to agree to the terms, making it binding on all unsecured debts. Conversely, Division I proposals require a majority in number and two-thirds in dollar value to agree to the terms.
Meeting of Creditors: Division I proposals mandate a meeting of creditors, whereas consumer proposals only require a meeting if explicitly requested by at least 25% of the debtor’s debt in dollars.
Allowances for default: If a debtor fails to make three months’ worth of payments in a consumer proposal, it is annulled, allowing creditors to pursue the amount owed plus accumulated interest. However, any default in a Division I proposal can cause the stay to be lifted, unless the debtor returns to court for approval of new proposal terms.
When Is a Division I Proposal Preferable Over a Consumer Proposal?
Considering the complexity and cost of a Division I proposal, why would someone choose it over a consumer proposal? If a debtor’s unsecured debts like credit cards, lines of credit, and bank loans exceed $250,000 and they need the protection offered by the BIA, a Division I proposal is their only option to avoid bankruptcy.
Notably, while most Division I proposals have a five-year term, they can be extended under unusual circumstances. On the other hand, a consumer proposal must be completed within a maximum of five years, though both types of proposals can be paid off early.
Comparing Proposal Procedures to Bankruptcy
Both proposal procedures present an alternative to filing for bankruptcy. The primary advantage over bankruptcy is that debtors retain all their assets.
To simplify, Division I proposals are used in convoluted situations with high debt levels. For most individuals, a consumer proposal is an effective solution to manage their debts.
If you’re contemplating filing a consumer proposal or need more information about the process, it’s advisable to consult a Licensed Insolvency Trustee for a thorough review of your options.
