Informal Proposals

In some very rare cases, it may be possible to negotiate a payment plan with your creditors without following a formal filing under the Bankruptcy and Insolvency Act.

In any informal proposal negotiation, there is nothing to stop the creditor from taking action against you while the proposal is being negotiated. This is particularly important when you are dealing with a creditor who has statutory rights to file Writs against your residence.

Knowing what creditors’ rights are in a bankruptcy (prior to initiating an informal proposal) is very important because it may be possible to take steps prior to filing any proceeding to protect your assets.

Unless you are represented by a lawyer or other licensed insolvency professional, there is a risk that you may offer your creditors more than you need to or can afford because you have not made an accurate assessment of your creditor’s rights against you in bankruptcy. Most settlement offers are based on providing the creditors with more than they would receive if you were forced into filing bankruptcy. The realization on the bankruptcy becomes the yardstick for them to measure what is being offered to them on the proposal.

If your debts are over eighteen months old, you should discuss limitations on your creditors actions under provincial legislation with your solicitor. Be careful - by simply agreeing that your debt is outstanding and by offering a settlement, you may have extended the statute of limitations to collect the debts.

It is likely that the creditors that you are negotiating with have professional advisors skilled in insolvency matters. Without proper advice you are at a significant disadvantage.

Sometimes informal negotiations are too informal and no steps are taken to control the creditors’ actions against you and your assets after the informal proposal is accepted. We have seen cases where creditors have agreed to an informal proposal but decided at a later date to abandon the agreement and proceed on their own against the debtor.

There are no established professional fees on informal proposals.

We have seen situations where the fee paid to a non-trustee advisor on an informal proposal is based on the amount of debt that is reduced or forgiven.

This fee arrangement is unfair since all you have to offer the creditors to meet the test in a formal proceeding is an amount greater or more certain than they would receive if you filed bankruptcy. Fees in most formal proposals are based on the amount being paid to settle the debts and not the amount of the debts settled.

The creditability of anyone who wants to bill their fee based on the amount that they reduce your debt by should be questioned. You should seek a second opinion, or talk to your lawyer.

Informal proposals should not be used to settle with creditors when the matter can be settled by a formal proposal. The formal proposal process contains a stay of proceedings that stops creditors from taking action against the proposal debtor until the proposal is voted on by the creditors and once it is accepted, it is legally binding on the creditors.

Advantages and Disadvantages of Informal Proposals

Advantages:

• Avoids bankruptcy, formal proposal or orderly payment of debt (OPD).
• Could buy some time to make good.

Disadvantages:

• Discussing your financial problems with creditors may "show your hand" whereby some may move in to seize assets or garnishee your income. You could be motivating your creditors to take action against you.
• Your handshake agreement with creditors will not be binding on creditors. Informal agreements are hard to negotiate alone when a number of creditors are involved.
• If you are not careful, your negotiations could extend the time your creditors have to pursue you to collect their debts from you.
• Canada Revenue Agency cannot be bound by an Informal Proposal.