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Formal Proposals
Formal proposals can only be filed under the Bankruptcy and Insolvency Act
by soliciting the services of a licensed Trustee. All Trustees are responsible
to Industry Canada and are licensed only after an extensive training period.
At this date an individual who completes a Trustee licence after obtaining
a Chartered Accountancy designation has invested over ten years in secondary
education to be in a position to advise you on your problems.
Any proposal is simply a negotiated
settlement between you and your creditors. In every
case the proposal has to provide your creditors with
something that they would not get if you filed an assignment
into bankruptcy. Settlements are usually for between
forty and sixty percent of your debt by payments without
interest over a sixty-month period. You have the option
to prepay the full settlement without interest or penalty
if your cash flow improves in the future.
When a proposal is filed, none of
your assets vest with the Trustee for the benefit of
your creditors. You are free to deal with your assets
as you normally would.
Proposals should be considered first
by people:
- Who have filed a bankruptcy in the past;
- Who have large income, or
- Who have large creditors who have the expertise
available to challenge a
Bankrupt’s discharge (ie: Canada Revenue Agency ).
As in all negotiations with creditors by a debtor, the most important thing
to be considered is if the debtor has enough cash to honour the terms of the
proposal. Failure to meet the terms of a proposal will result in the proposal
being annulled and could precipitate an automatic bankruptcy.
There are two types of Proposals:
Consumer Proposal
The total debts excluding any mortgages
on your “principal residence” can not exceed
$75,000. In order for the proposal to fail, more than
fifty percent of the creditors must vote against the
proposal or one of your creditors must convince the
Court that the proposal has been filed in a dishonest
or fraudulent manner. If the creditors do not accept
the proposal, the proposal debtor is not automatically
bankrupt, and the proposal debtor can proceed with
his life and deal with his creditors on his own, or
consider bankruptcy as an alternative. Often, if the
proposal cannot be negotiated, the proposal debtor
will have the option to file personal bankruptcy to
deal with creditor pressure. The fact that a proposal
debtor has tried to file a proposal instead of directly
going to a bankruptcy assignment will be viewed positively
if a creditor objects to the debtor’s discharge
from bankruptcy. Read More
Division One Proposal
This type of proposal is generally
filed in complicated or large insolvent situations.
There is a requirement for a formal meeting with your
creditors and a formal vote on your proposal. In order
for the proposal to be accepted, the majority of your
proven creditors must vote in favour of the proposal
and those voting in favour must control over two-thirds
of the proven claims against you.
The major concern with this type
of proposal is that if your creditors do not accept
the proposal, you will be deemed to be automatically
bankrupt. Any assets that you have that are not protected
will become available to your trustee and to your creditors.
Since a failed Division One Proposal
results in an automatic bankruptcy, the decision to
file bankruptcy is not the debtor’s. It can be
argued that the creditors forced the bankruptcy because
they were not in a position to settle their debts for
an amount that the debtor was able to pay. This is
important if a creditor later objects to your discharge
from bankruptcy. Read More
Advantages and Disadvantages
of Proposals
Advantages:
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Your assets remain under your
control.
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Creditors cannot seize assets
or garnishee wages.
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You can borrow funds or continue
a business without having to disclose your financial
situation.
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The filing of the proposal
is a starting point for creditor settlement negotiations.
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Creditors cannot, because of
legal protection of the debtor, take retaliatory
action, like firing, for filing a proposal.
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Payments are negotiated on
your ability to pay.
-
Proposals may not require full
payment of debt or interest to creditors.
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Once accepted, the proposal
is binding on all unsecured creditors.
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Most trustees will provide
proposal debtors with the documents that they require
to start tracking their income and expenses on
a cash basis. Developing a cash history is the
best way to start a financial plan.
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You can avoid bankruptcy.
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Slightly better credit rating
than bankruptcy.
Disadvantages:
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Proposals do not affect obligations
that are not discharged by bankruptcy _ LINK or
change the position of secured creditors.
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Proposals must give creditors
more than they would otherwise receive in a bankruptcy.
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Creditors have the right not
to accept the proposal and can alter the terms
as a condition of acceptance.
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