GENERAL DESCRIPTION OF A CONSUMER 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 also 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.

A person is eligible to file a Consumer Proposal if his or her aggregate debts, excluding debts secured by a principal residence, do not exceed $75,000. The consumer Proposals cannot be for more than five years. If the creditors do not accept the Proposal the debtor is not automatically bankrupt. Counselling is required.

STEPS TO FILE A CONSUMER PROPOSAL

• Choose a Trustee and discuss all your options before you decide on a Consumer 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.
• The Consumer 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 Consumer Proposal and some financially relevant personal information of the debtor, to all known creditors.
• Voting
  Unsecured creditors will have forty-five days to request a meeting to vote on the Consumer Proposal. If twenty-five percent of the unsecured creditors responding to the proposal request a formal meeting to consider the Consumer Proposal, the Trustee will arrange a meeting to vote on whether to accept or reject the Consumer Proposal. At the meeting, if the majority in value of the unsecured creditors, who are voting, accept the Consumer Proposal, it will become binding on the debtor and all creditors. If no meeting is requested, the proposal is deemed accepted.
• Once the creditors accept a Consumer Proposal, it is deemed approved by the Court after fifteen days have expired, unless one of the creditors requests a court hearing to approve the Consumer Proposal. The Court has the ability to reject a Consumer Proposal though this rarely happens.
• You will be required to attend two financial counselling sessions. The counselling will help you understand the cause(s) of your financial difficulty and provide information to assist you in managing your financial affairs in the future.
• Once the Consumer Proposal is accepted, the debtor will make the payments to the Trustee, as provided for in the Consumer Proposal. This may involve a one-time lump sum payment or monthly payments.
• The Trustee will make dividend payments to the creditors in accordance with the terms of the Consumer 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.

Advantages and Disadvantages of Consumer 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.
• The Proposal “opens the door” for settlement acceptable to creditors .
• Proposals are the only method where Canada Revenue Agency can reduce outstanding personal income taxes.
• Creditors cannot, because of limitations in the Bankruptcy and Insolvency Act, take retaliatory action, like firing an employee or terminating a lease, because a person files 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.

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

If you filed bankruptcy before September 30, 1997 and you are still bankrupt, you cannot file a consumer proposal. You must file a Division One Proposal.

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 Consumer Proposal may be filed by two or more individuals, if the Consumer 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 consumer debtors may result in the failure of the other consumer 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 shortfall will be treated as unsecured and dealt with as part of your Consumer 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 ("CRA") 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 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 Proposals - Consumer Proposal

If your Consumer proposal is rejected you will no longer be protected by the Bankruptcy and Insolvency Act and your creditors will be able to take legal steps to recover their debts from you unless you file an Assignment in Bankruptcy or another proposal. Please note that if a second Consumer Proposal is filed within six months of the first Consumer Proposal the consumer debtor is not protected from his creditors by a stay of proceedings under the Bankruptcy and Insolvency Act.

Assets

Your assets are not affected by filing of a Consumer 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 maximum 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 - Consumer 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 default on three (3) payments during the term a Consumer Proposal the proposal is annulled and the debts owing to unsecured creditors are not discharged. The unsecured creditors can begin to seek payment from you directly again. You can file another proposal but there are restrictions. You should discuss the options with the Trustee on your original Consumer 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. It is a good idea to try to prepay some of the required payments to reduce the time the proposal is on a person's credit rating. Prepayments can be made without penalty or interest.

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 Consumer 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 to reduce interest and penalties, the only way that Canada Revenue Agency ("CRA") can settle your tax liability is through a Proposal or Bankruptcy.

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

Canada Customs 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.