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Consumer Proposals
Personal Bankruptcy

What are Consumer Proposals
An individual experiencing financial problems can make a Consumer Proposal to unsecured creditors. Proposals are usually prepared in consultation with a Licensed Insolvency Trustee and must conform to the regulations set out in the Canadian Bankruptcy and Insolvency Act.

What is a Consumer Proposal?
A Consumer Proposal is put forward by a debtor to his/her creditors and must produce a better result for creditors than a bankruptcy (otherwise it would not be an acceptable proposal).

A Proposal usually consists of some form of financial compromise to creditors, generally a reduction in the amount owed and a period of time within which to make payments (no more than five years).

Who can file a Consumer Proposal?
A Consumer Proposal can be filed by an insolvent person who owes $75,000 or less, excluding amounts owing under a residential mortgage.

An insolvent person is anyone whose liabilities to creditors exceed $1,000 and who is unable to meet his obligations as they generally become due or has ceased paying his current obligations in the ordinary course of business or whose property is not at a fair valuation or disposition, sufficient to enable payment of all his obligations.

Why should I consider a Consumer Proposal?
A Consumer Proposal is a viable option for several reasons:

  • when you recognize that you can afford to pay part, but not all, of your debts, a Proposal is a better alternative than a bankruptcy and, at the same time, provides a means of dealing reasonably with financial difficulties.
  • if a Consumer Proposal is rejected by creditors, it does not result in automatic bankruptcy. (There are sometimes situations where bankruptcy is not an option, such as where bankruptcy would result in the requirement to resign from a profession, or lose a broker's license.)
  • an automatic Stay of Proceedings goes into effect upon filing a Consumer Proposal. The Stay prevents unsecured creditors from proceeding with legal or collection action until the Proposal is dealt with. This may be important where you are under threat of garnishment or other legal proceedings.
  • financial problems which continue to go unaddressed will often compound themselves to the extent that they have an impact on family and job situations. A Consumer Proposal can resolve the problem.
  • a Proposal is very much like a loan consolidation. It generally results in one monthly payment being made, and therefore eliminates the need to deal with a number of creditors at the same time.
  • What rights do creditors have in a Consumer Proposal?
    After you put forward a Proposal, creditors have the right to accept or reject it. For a Proposal to be accepted, it must be approved by creditors holding more than 50% of the value of the unsecured debt.

    Creditors who do not wish to accept the Proposal must specifically advise the Licensed Insolvency Trustee of their position. If sufficient objections are received, a meeting will be called to vote on the Proposal.

    If no creditors object to the Proposal within 45 days from the filing date, it is deemed to be approved by the creditors.

    Creditors may ask for changes to the terms of the Proposal before giving their consent. You may accept or reject the change.

    An example of creditor approval scenarios

    The following debts are owed:
    ABC Bank = $6,000
    Credit Card Inc. = $5,000
    Canada Customs and Revenue = $2,500
    Total debt = $13,500

    If creditors were voting on the Proposal, the following might occur:

    (1) if no creditors objected within 30 days, the Proposal would be deemed to be approved.

    (2) if ABC Bank accepted the Proposal and Credit Card Inc. and Canada Customs and Revenue rejected it, the Proposal would fail. As a result, the Stay of Proceedings would be lifted and creditors would be entitled to pursue recovery of their debts.

    (3) if ABC Bank accepted the Proposal, Credit Card Inc. rejected it, and Canada Customs and Revenue did not respond, the Proposal would be accepted and become legally binding on all unsecured creditors, including Canada Customs and Revenue.

    Where a Proposal is accepted, it is legally binding on all unsecured creditors, even those who have voted against it. If you should subsequently default on your obligations under the Proposal, the rights of the creditors to pursue their debts are restored. Bankruptcy does not automatically result, although you may choose to file for bankruptcy, on the default of a proposal.

    What does a Consumer Proposal look like?
    A Consumer Proposal can take many forms. It is intended to be flexible to deal most effectively with each individual's unique situation.

    Here are some examples of situations and Proposals:

    Situation A
    An individual has been laid off for a period of time and has fallen behind in paying a number of debts, including the mortgage. He believes that, if he can catch up on his mortgage payments, he can reasonably manage the other debts over time.

    Consumer Proposal A
    A Proposal was made for payment of $300/month for 24 months, commencing three months after approval of the Proposal. This would provide sufficient time to bring the mortgage current and pay approximately 90 cents on the dollar to unsecured creditors.

    Situation B
    A couple has recently separated, resulting in increased living expenses and an inability to manage debts of approximately $25,000. Based on their revised circumstances, it was determined that only $500/month was reasonably available to service these debts, although significant tax refunds were anticipated in the near future.

    Consumer Proposal B
    A joint Proposal was made to creditors providing for payments of $500/month to a maximum of $15,000. In addition, future tax refunds were assigned to the Administrator to be applied against the required payments. As a result, it was anticipated that creditors would receive approximately 50 cents on the dollar over a period of 18 to 24 months.

    Situation C
    An individual has $50,000 in guaranteed business debts. As a result of the business failing, he was called upon to pay the loan. Additional personal debts of $10,000 were owed. It was clear that in a bankruptcy, there would be very little available for creditors. A third party was prepared to assist the individual by advancing $10,000.

    Consumer Proposal C
    A Proposal was made to creditors for a lump sum payment of $10,000 in full satisfaction of all outstanding debts. While the proposal resulted in only 15 cents on the dollar to creditors, it was more than they would otherwise receive, and the amount was available immediately.

    Are there costs associated with a Consumer Proposal?
    Yes. Licensed Insolvency Trustee's fees are based on a percentage of the amount offered under the Proposal. Initial filing, document preparation and counselling fees also can be written into the Proposal. Your Licensed Insolvency Trustee will generally want a deposit, usually at least $100.

    Where can I go for help?
    Talk to a Licensed Insolvency Trustee, such as Smith Cageorge Bailey, Inc., to assist you with preparing and filing a Proposal.

    Copyright 2011 - Smith Cageorge Bailey, Inc.


    Dealing with Financial Difficulties
    Evaluating Financial Difficulty
    Personal Bankruptcy
    Glossary of Terms