In Canada a consumer proposal is a formal offer from you to your creditors, where you agree to pay part or all of your debt over a specific period of time.
This is done by making set payments to the Licensed Insolvency Trustee (LCTaylor) who then distributes the money to the creditors until the balance of your debt is erased.
A consumer proposal is designed on an individual basis to meet the specific needs of each debtor, but ultimately must offer the creditors more money than they would get if you went bankrupt.
Under the Bankruptcy and Insolvency Act there are two types of proposals – Consumer Proposal and Division 1 Proposal.
Both types of credit proposals allow you to settle the debt while preventing creditors from taking legal collection action like a garnishment. They also bind creditors into an agreement so your debt solution is set and will not change.
In Winnipeg, CONSUMER PROPOSALS are intended for individual debtors who want to settle their debts for less than they owe with their creditors.
- You must owe less than $250,000.00 excluding a mortgage on your principal residence
- Proposal must be completed within five years
- Provides you with an affordable means of paying back at least a portion of what you owe
- Gets you out of debt
- Offers affordable payments
- Always costs more than a bankruptcy
- Usually lasts longer than a bankruptcy
- Can negatively affect your credit rating
Financial counselling is a requirement of consumer proposals.
DIVISION 1 PROPOSALS are intended for corporations or for individuals who owe more than $250,000.00 excluding a mortgage on a principal residence.
They are very similar to consumer proposals with a few exceptions, including the fact that the debtor is automatically bankrupt if the proposal is rejected by the creditors or the court.
Counseling is not required.
What is a Division One Proposal?
A Division One Proposal under the Bankruptcy and Insolvency Act of Canada is a debt repayment plan similar to a Consumer Proposal, where you offer to repay your creditors either in full or a percentage of the amount owing. A proposal under Division One applies to consumers who owe more than $250,000.00 (not including a mortgage on a principal residence). A Division One proposal is sometimes referred to a ‘Corporate’ proposal as a business and/or corporation can file a proposal, or restructuring plan, under this section of the Act.
Protection from Creditors Before and During the Proposal
If you file a Division One proposal there is an automatic Stay of Proceedings that goes into place. This stops all collection practices while the proposal is in place. The Stay also goes into place should you file a Notice of Intention (NOI). Before filing a Division One proposal, one has the ability to file a NOI that you intend to file a proposal but need a little bit more time to put the details into place. Yes, this does buy you time and protects you from your creditors, but you have to be serious about wanting to file. If you do not follow the rules and the prescribed time lines you can end up being put automatically into bankruptcy.
Some Details to Consider Carefully
Because you generally owe a substantial amount of money in a Division One proposal, or you have business that you believe to be viable, the rules are stricter than in a Consumer proposal. In a Division One proposal, there is automatically a Meeting of Creditors as well as a Court hearing to approve the proposal. If the Proposal is not approved, it results in an immediate bankruptcy. Further should you default on payments, you could end up in a bankruptcy. There can also be income tax implications associated with any debt that is written off in the proposal. CRA often considered the written off debt to be equivalent to income. LCTaylor, your local LIT would discuss the details of this type of proposal with you so that you are well informed of the details.
What Information is Required before Filing?
A Division One proposal is definitely an alternative if you have a viable business that has come upon some tough times, but which you think has a bright future. It all starts with a cash flow statement. That is something that LCTaylor can help you prepare. Both a cash flow statement as well as a cash flow projection are required under this type of proposal. This will also help to figure out if the business is viable and thus worth salvaging.
When a business or corporation is no longer viable, the directors will need to look at which corporate debts they are liable for. If the directors are not in a position financially to pay the debts of the corporation that they are responsible for, the directors may need to speak with LCTaylor about their personal situation. Sometimes the personal guarantees and director liability are too much to handle and a personal bankruptcy or a consumer proposal may be the result of a failed business.
Many small businesses are sole proprietorships or partnerships. In those situations, the debts are actually personal to the owners, and so a consumer proposal or bankruptcy might be the best course of action. Other sole proprietorships may have incorporated their business, but still personally guaranteed the debts. In those situations, it might be possible to simply shut down the corporation, and deal with the personal guarantees through a bankruptcy or consumer proposal.
The only way to know if a Division One Proposal might be something that could help your business, is to come in to meet with one of our experienced Trustees. They will be able to give you all of the options available. If you are determined to save the business, they will help you figure out how to do that, if it is possible. If you are just plain tired of the whole thing and want to wrap it up, they will also be able to give you options on how to do that with the least personal cost possible. Give us a call for a free, confidential consultation.