When is a Consumer Proposal Legally Binding on your Creditors?
Understanding the Legality of a Consumer Proposal:
When Does It Bind Your Creditors?
A consumer proposal is a formal agreement that is negotiated between you and your creditors, aiming to settle your debt for less than the full amount. But when does it become legally binding for your creditors? This article will delve into the legal aspects of a consumer proposal and shed light on the role of creditors in the process.
What is a Consumer Proposal?
A consumer proposal is a proceeding under the Bankruptcy & Insolvency Act (BIA Act). This procedure, once filed with a Licensed Insolvency Trustee, binds all parties involved – debtors, creditors, and the trustee – by the provisions of the BIA Act. The Act delineates all rules and regulations governing consumer proposals in Canada, and everyone’s rights in a proposal.
Initiating the Consumer Proposal: The Stay of Proceedings
The initial legal action in a consumer proposal is the filing of your proposal documents. As your proposal documents are electronically filed with the federal government, you receive a legal stay of proceedings. This stay gives you immediate protection from further creditor actions, meaning any pending lawsuits are paused, wage garnishments cease, and you can instruct creditors to stop contacting you as you have filed a proposal.
Who is Bound by a Consumer Proposal?
A consumer proposal primarily deals with unsecured creditors. Secured debts, such as your mortgage or car loan, are not included in a proposal to creditors. Usually, this is advantageous. As long as you continue to meet your monthly payments on your secured loan, your lender is not likely to take any action, meaning your mortgage or car loan is not affected by filing a consumer proposal. However, if you miss payments, your secured lender retains the right to seize the asset provided as collateral.
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The Acceptance of a Consumer Proposal: When Does It Become Legally Binding?
After your proposal is filed, your trustee sends a copy of your offer to all your creditors for their consideration. Your creditors have a 45-day window to file ‘claims’ and vote for or against your proposal. They might request a creditors’ meeting to review or discuss the terms further. If less than 25% of creditors request a meeting, the proposal is deemed accepted. If 25% ask for a creditor’s meeting, and at the meeting, the majority of your creditors by dollar value agree to the proposal, it becomes legally accepted.
Once accepted, the proposal is binding on all unsecured creditors.
This is a significant advantage of a consumer proposal if you are dealing with multiple creditors. You do not need to negotiate a separate deal with each creditor. If the majority of your debts vote in favor, your proposal will pass.
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Crafting a Successful Proposal
Your trustee, when assisting you in crafting a successful offer to your creditors, will consider the number of creditors you have, the size of their individual claims for debts you owe, and who may have enough voting weight to influence the outcome of the vote. The goal is to make an offer that is sufficient to get the majority to agree but does not necessarily require unanimous agreement. If you are worried about one disgruntled creditor, as long as they are not large enough to be a majority creditor, you should not need to worry.
For a legally binding debt settlement of your debts, it is advised to contact a Licensed Insolvency Trustee for a free consultation.
In conclusion, a consumer proposal becomes legally binding when it is accepted by the majority of your creditors. Understanding the legal aspects and the role of creditors can help you navigate this process more effectively and make informed decisions about your financial situation.
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