Proposal

GENERAL DESCRIPTION OF A DIVISION ONE PROPOSAL

The Bankruptcy and Insolvency Act offers proposals as alternatives to bankruptcy.

The purpose of a Proposal is to give a debtor or a bankrupt an opportunity to make a settlement with his/her creditors while avoiding bankruptcy. Executions, garnishees, and other actions by creditors will be stopped once the Proposal is filed.

A Proposal is an arrangement to pay your creditors when you can no longer make your regular payments. It is a way to negotiate with your creditors for the reduction of your debts and/or extension of time to pay the debts. The payment plan that is developed is based on your income, living expenses and family responsibilities.

A Proposal may be funded by yourself, a third party, or through the sale of assets that would not normally be available to your creditors. The Proposal is legally binding on all your creditors once accepted.

In a Division One Proposal there is no restriction on the size of the debt. If the creditors do not accept the Proposal the person is automatically bankrupt effective at the date of the filing of the Proposal. Counselling is not required.

STEPS TO FORMING A DIVISION ONE PROPOSAL

Briefly the steps are:

• Choose a Trustee and discuss all your options before you decide on a Division One Proposal.
• The Trustee and you will prepare a Statement of Affairs that lists all of your assets, creditors, income, expenses and other pertinent information.
• The Trustee will review your situation and confirm what the creditors would be entitled to receive if you decided to file a bankruptcy. Your proposal must give the creditors more than they would receive in a bankruptcy. There is no formal limit to the length of time that a Division One Proposal can be filed for but usually proposals over five years are not positively received by the creditors,
• The Division One Proposal will be filed. After filing the Consumer Proposal with the Superintendent, the Trustee will send a notice of the Proposal, together with a copy of the Division One Proposal and some financially relevant personal information of the debtor, to all known creditors along with notice of the time and place for a creditors' meeting to vote on the proposal..
• Voting
  In order for the Division One Proposal to be accepted each creditor group must pass a special resolution approving the proposal and the approved proposal must obtain formal approval of the Court. A special resolution requires the support of a majority in number of creditors filing claims prior to the meeting holding at least two-thirds of the proven debt.
• The Trustee will make dividend payments to the creditors in accordance with the terms of the Proposal.
• Once you have met the terms of your proposal, you will receive a document stating that you completed your proposal and you will have no further obligation for the debts covered in your proposal.

People should consider proposals before filing bankruptcy if:

• They have filed a bankruptcy in the past;
• They have large income, or
• They have large creditors who have the expertise available to challenge a Bankrupt’s discharge (ie: Canada Revenue Agency).

Advantages and Disadvantages of Division One Proposals

Advantages:

• Your assets are still under your control.
• Creditors cannot seize assets or garnishee wages. The Proposal will stop lawsuits, garnishees and seizures of assets.
• Creditors may view the completion of the proposal as more favorable than bankruptcy.
• A Proposal is the only way that you can negotiate for a settlement of outstanding income taxes.
• The Proposal “opens the door” for settlement acceptable to creditors
• Creditors cannot, because of limitations in the Bankruptcy and Insolvency Act, take retaliatory action, like firing an employee or terminating a lease, for filing a proposal.
• Payments are negotiated on your ability to pay.
• Proposals do not require full payment of debt or interest to creditors – they only have to give the creditors more than they would receive in a bankruptcy.
• The proposal is binding on all unsecured creditors once accepted

Disadvantages:

• Proposals do not affect all obligations for alimony, child maintenance, student loans or change the position of secured creditors.
• Creditors have the right not to accept the proposal and can alter the terms as a condition of acceptance.
• Creditors may reject the proposal. Bankruptcy will ensue on rejection of proposal by creditors or by the Court.

Special Rules Relating to Filing of Proposals by Individuals who are Bankrupt

If you filed bankruptcy before September 30, 1997 you must file a Division One Proposal.

If you are currently bankrupt you will have to have the inspectors in your bankruptcy approve filing the proposal if there are Inspectors. Please note that in this situation, the proposal has to be filed with the Trustee who is handling your bankruptcy.

Who Can File

If you owe more than $1,000 and are unable to pay your debts when they are due, you can file a Proposal.

A joint Division One Proposal may be filed by two or more individuals, if the Division One Proposals can be reasonably dealt with together because of the financial relationship of the consumer debtors involved (e.g. married couple, common-law partners). We do not recommend joint proposals because creditors negative reaction to one of the proposal debtors may result in the failure of the other proposal debtor’s proposal. The liabilities and the assets of both consumer debtors should almost be identical in order for the creditors to accept the joint filing.

Secured Creditors

Secured Creditors have a charge on an asset, such as a mortgage on a house or a bank or a finance company holding security on your car.

You have the following options to deal with a secured creditor in a proposal:

If you elect in your proposal to surrender secured assets and cease making payments to secured creditors they will be entitled to recover the assets pledged to them as security. In these circumstances you will not be responsible for any resulting shortfall that may arise from the sale of the asset held as security by the secured creditor because that debt will now be treated as unsecured and dealt with in the Division One Proposal.

Please note that if you elect to continue making payments to secured creditors and, at a later date, you are unable to continue the payments, the protection afforded to you by your Proposal may be lost.

Unsecured Creditors

Unsecured Creditors are those that have no charge on an asset, such as credit cards, most bank account overdrafts, lines of credit and Canada Revenue Agency for income tax arrears. Proposals are designed to deal with these and any other unsecured creditors that you may have.

Filing a proposal has the following affect on your creditors:

A proposal does not release the following debts that are not discharged by bankruptcy.

At the conclusion of your proposal all unsecured debts are forgiven (discharged). Secured debts, such as a mortgage on your house or a charge on your car will remain, unless you have chosen to surrender the security to the secured creditor in your proposal.


Rejected Division One Proposal

If file a proposal under Division 1 and the proposal is rejected by your creditors, automatic bankruptcy results. As a bankrupt, you cannot file another proposal without approval of the Inspectors of your bankrupt estate. If there are no inspectors, it may be necessary to have your trustee call another meeting of creditors so that the creditors can appoint Inspectors. You may have to consider talking to one of the creditors who voted in favour of the failed proposal, to see if they will agree to act as Inspectors in your bankrupt estate so that you can file another proposal as a Bankrupt.

A vote against your original proposal by the creditors is an indication that the bankruptcy option should be reconsidered.

Assets

Your assets are not affected by filing of a Proposal. However, if you have pledged an asset to a creditor, such as a car, you will have to continue the usual payments or you will lose the asset. If you cannot afford the payments on the secured asset it should be turned over to the creditor.

Drafting The Terms Of a Proposal To The Creditors

One of our insolvency professionals will assist you in developing a formal arrangement to your creditors to settle your debts.

The settlement to your unsecured creditors is usually in the form of monthly payments, for a term of sixty months. It can include a single payment advanced from friends or family members or from the proceeds from the sale of assets that would not be available to your creditors in a bankruptcy.

In order to determine what to offer the creditors, we have to meet with you to review your monthly cash flows to determine what you can afford to offer to your creditors.

A proposal to your unsecured creditors must provide more to your unsecured creditors than they would otherwise receive if you were to file for bankruptcy.

Effect of Failure to Make the Required Payments Set Our in the Proposal - Division One Proposal

It is important to make a proposal based on what you can afford to pay so that you do not miss payments and run the risk of having your proposal annulled.

If you do not follow the terms of the proposal, the trustee or one of your creditors may annul your proposal and you will become bankrupt.

You can file another proposal as a bankrupt but there are some restrictions. You should discuss these with the Trustee on your original proposal.

Proposal and Credit Rating

If the individual filing the proposal has perfect credit prior to filing the proposal, their perfect credit rating will be downgraded to a R-7 (R-9 is the worst credit rating). The down graded credit rating will remain on their credit rating until four years after the proposal is completed. Please note that this rating would be on a person’s credit report for nine years if they filed a proposal involving payments to the creditors for sixty months.

Most of the debtors that we talk to do not a perfect credit rating. Most people seeking advice on their situation have a bad credit rating as a result of their creditors classifying them as R-9 when the delinquent account is sent for collection. Because credit reports are histories of your credit, filing a proposal will not improve an already bad rating from an R-9 to an R-7.

Cost of Proposal

Trustees in Bankruptcy are governed by the Bankruptcy and Insolvency Act and there is a tariff of fees, set by the Federal Government, based on the total receipts in each estate.

The fees paid to the Trustee are included in the settlement made by you under the terms of the Proposal . There is no additional cost to you.

If your creditors do not accept the proposal and you do not file an assignment with our firm, you will be responsible for the fees and disbursements related to the failed proposal.

Proposals and Unpaid Taxes

Outside of a special application under the Fairness Legislation, the only way that Canada Revenue Agency ("CRA") can settle your tax liability is through a Proposal.

CRA usually will accept less than the full amount owing for income tax, interest, and penalties.
Terms of the proposal will depend on your situation.
For CRA to accept your proposal, it must include the following terms:

Canada Revenue Agency is as concerned about after proposal filing as unpaid taxes. People who successfully negotiate a settlement proposal on their income taxes and then do not meet filing and payment deadlines on their post proposal income will likely have their proposal annulled. Canada Revenue Agency insists on the proper tax filing by a proposal debtor during the time of the proposal payments as a condition of their acceptance of a proposal.