Division I Proposal – A Personal Proposal Story.
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This proposal story illustrates how a Division I Proposal operates. This is another option that consumers have in addition to the consumer proposal. The Division I Proposal can be used for businesses.
Peter was worried sick. He felt like a failure. He had always been supremely confident and felt he could accomplish almost anything he set his mind to. Now he had grave doubts. He was a failure, he thought, at 27 years of age!
Peter had started a business a few years ago. The business supplied and installed customized audio systems in vehicles. There was excellent demand in this niche market and the business thrived. Peter had opened a second location in a town about 100 kilometres awa and his best friend, Anthony, was managing this location.
Then things started to go wrong. The second location was not doing well and sales were poor. Peter had spent the whole weekend going over the books and it was a disaster. Not only were the sales low but he also found out that extending credit made up a large part of the sales. He knew a large percentage of the debt was not collectable.
He had made it clear to Anthony that under no circumstance was he to extend credit. It was cash up front or payment by credit card.
“Why did you do this?” he asked his friend.
Anthony was contrite. “I am sorry, Peter. What can I say? I thought I was doing the right thing.”
Peter knew the business could not survive. He went to the bank and they immediately appointed a receiver. In time, the bank was paid out from the proceeds from the inventory and the collection of accounts receivable. So was Canada Revenue Agency (CRA).
When the dust settled, Peter found he was personally liable for the business debt he had personally guaranteed. There was also his personal debt to contend with, made up of credit card debt of $5,000 and income tax owing of $5,000. In total, he owed $80,000.
Peter went to see his father, who was a successful businessman. His father listened to Peter’s story. He didn’t criticize Peter and didn’t say “I told you so.” Instead, he asked a few questions about the debt and said that Peter had to get professional advice as soon as possible. Peter’s father said he knew a bankruptcy trustee and did Peter want him to set up an appointment? Pet said he did.
“Do you want me there too?” asked his father.
“I do,” replied Peter.
Peter and his father were now meeting with the trustee. The trustee had reviewed Peter’s financial information and had asked a number of questions. One question concerned Peter’s current income.
Peter said he was working as a salesman in an audio store and was making about $1,800 a month in take-home pay.
The trustee said he could only see two options for Peter. One was bankruptcy, which would see all the debt erased, including the CRA debt, and would see Peter discharged in nine months.
“What is the second option?” asked Peter.
“It’s a proposal,” the trustee replied. “But since you do not have an income sufficient to make payments on a proposal it would have to be a lump sum proposal with funds put up by a third party.”
The trustee explained that if Peter earned enough to pay, say, $20,000 over 40 months, he thought that would be acceptable to the creditors and Peter could file a proposal, thus avoiding bankruptcy.
Peter’s father said he would like to know more about this and said he might be prepared to put up the money.
The trustee explained that the terms of the proposal were only limited by imagination and the following rules:
* Creditors had to be better off than in a bankruptcy;
* Creditors voting for the proposal had to represent more than 66.67 percent of the dollars voting and more than 50 percent in number of those voting;
* The proposal had to be approved by the court.
The trustee explained that the creditors who voted would bind all unsecured creditors to the proposal – even the creditors who did not vote and those who voted against the proposal.
Peter’s father asked the trustee what the advantages were of a proposal compared with a bankruptcy.
The trustee said that a bankruptcy was cheaper and would cost a minimum of $1,800. The record of the bankruptcy would be erased from the credit bureau report six years after the discharge from bankruptcy, or about seven years after an assignment into bankruptcy.
The advantages of a proposal were that the credit bureau record would be erased three years after the proposal was filed. There was another possible advantage, the trustee stated, but it would depend on a value judgement by Peter as to whether it was really an advantage. That possible advantage was that a proposal was not a bankruptcy.
The trustee asked Peter if it was important to him not to go bankrupt. Peter said it was.
Peter’s father asked the trustee how much the lump sum should be. The trustee said it was up to Peter and his father to come up with the dollar amount. The trustee reiterated that in Peter’s case, if the creditors did not accept the proposal and Peter went bankrupt the creditors would receive nothing. If the creditors accepted the proposal, they would be paid the proposal amount in approximately three months.
Peter and his father conferred for a few minutes and then Peter’s father told the trustee that he was prepared to put up $16,000. He asked the trustee if he thought that would work. He also asked the trustee how he would be paid.
The trustee said he felt that the amount would be acceptable. He said his fees would be about $4,000 and would come out of the $16,000.
The trustee said he would draft the proposal and have it ready to sign in two days. He said he would need a bank draft from Peter’s father in the amount of $16,000 at that time. He explained that he and Peter’s father would sign an agreement that the $16,000 would be returned to Peter’s father if the creditors did not accept the proposal or the court did not approve it.
The trustee also reminded them that the creditors’ meeting would vote on the proposal 21 days after the proposal was filed. The trustee said that Peter was required to attend the meeting and that he thought Peter’s father should also attend.
Peter and his father said they understood and made an appointment for Peter to attend at the trustee’s office in two days to sign the proposal and associated documents. Peter’s father said he would have the funds in the hands of the trustee the next day.
Peter and his father were now at the trustee’s office, attending the creditors’ meeting. There were three creditors in attendance, inclucing a representative from Canadian Revenue Agency (CRA). The trustee had checked the proofs of claim that the attending creditors had provided.
The trustee chaired the meeting. He reviewed the report he had sent to all the creditors giving the background and the terms of the proposal. He also reminded the creditors that he was recommending that the proposal be accepted since the creditors in the proposal would get about $12,000 or 15 cents on the dollar, while if they voted against the proposal and Peter were to go bankrupt, they would get nothing.
The trustee said that the purpose of the meeting was to consider and vote on the proposal. The trustee told the meeting that he had three voting letters voting in favour of the proposal. The trustee asked if there were any questions.
The creditors asked a number of questions of Peter concerning how the business failed.
The representative of CRA informed the meeting that she would be voting against the proposal unless CRA received 100 cents on the dollar.
Peter and his father conferred for a few minutes.
Peter informed the meeting that he was prepared to go into bankruptcy if the creditors did not accept the proposal. Peter’s father said that he was not prepared to put up any more money.
The trustee called for voting letters to be filled out by the three creditors present.
The trustee took a few minutes to tally the votes and then announced that the creditors had accepted the proposal as follows:
The trustee said he would immediately make an application to the court to have the proposal approved by the court. He informed the creditors he would notify the creditors of the court date.
The court approved the proposal. Later the trustee paid out the required monies to the creditors and issued Peter a certificate of completion as evidence of the successful completion of the proposal and erasing of his unsecured debt.
This proposal story illustrates some of the most powerful features of a proposal:
* Creditors representing only $35,000 of the $80,000 in debt voted to accept the proposal but all the creditors are bound by the terms of the proposal;
* Canada Revenue Agency voted against acceptance of the proposal but they, too, are forced to accept the terms of the proposal;
* A third party (Peter’s father) funded the proposal with the funds he advanced to be refunded to him if the creditors did not approve the proposal. This is a fairly common occurrence and provides a very persuasive motive for the creditors to accept the proposal (i.e., the creditors will get $12,000 if they accept the proposal and nothing if they refuse to accept it).
If you have any questions about this or other aspects of bankruptcy or consumer proposals you can set up a FREE consultation with our trustees, who are in every province and territory in Canada: