What is a consumer proposal?
A proposal to creditors is a deal you negotiate with the people you owe money to in order to repay a portion (or perhaps all) of what you owe. If you like legal terms, a proposal is an “arrangement” to “settle” your debts for less than their full amount.
You might be asking yourself, “Why would anyone accept a deal for me to repay less than what I owe?” That’s a good question. The answer is that a proposal to creditors was created as an alternative to filing for bankruptcy. In most bankruptcies, the creditors receive little or no money back. In a proposal to creditors they know they will receive something. Something is better than nothing – it is as simple as that.
In 2014 Canadians filed 53,211 proposals (as a comparison Canadians filed 64,839 bankruptcies). For something that most people have never heard of, there are an awful lot of proposals filed…
Now that you know what a proposal to creditors is, we need to discuss the two types that are available to be used by Canadians pursuant to the Bankruptcy and Insolvency Act (BIA). The first is called a consumer proposal and the second, a Division I proposal to creditors.
Consumer proposals were created to be used by individuals to deal with their personal debts. The total amount of debt, excluding the mortgages on your principal residence that may be included in a consumer proposal is $250,000 per person filing. (When a couple files a consumer proposal together, the total debt that may be included is $500,000, excluding mortgages). If your total debt exceeds the $250,000 limit you are not eligible to file a consumer proposal.
3 Main Differences Between the Two
1. So, the first obvious difference between these two types of proposals, is the fact that consumer proposals are limited to $250,000 worth of debt, while Division I proposals have no limit.
By default, the vast majority of proposals filed are consumer proposals as most people have less than $250,000 worth of debt. Interestingly, you may file a Division I proposal with less than $250,000 worth of debt if you want to, but since a Division I proposal is more complicated and more expensive very few people do.
2. The second major difference between a consumer proposal and a Division I proposal is that if you cannot successfully negotiate a deal with your creditors in a Division I proposal, you are deemed to have filed bankruptcy. Differently, if you cannot negotiate a deal with your creditors when you file a consumer proposal, you simply end up back where you started – no deal, but no bankruptcy unless you decide to file yourself. Of course, if you can’t come to a deal with your creditors when you file a consumer proposal you probably will file for bankruptcy, so maybe this difference is not all that important.
3. The third major difference between a consumer proposal and a Division I proposal is the manner in which they are administered. Consumer proposals have been designed to minimize the costs associated with the proposal. If a simple majority in dollars you owe agree to the terms you have offered, then your consumer proposal is binding on all of your unsecured debts. Division I proposals require a majority in number and 2/3 in dollar value of a person’s debts to agree to the terms. In addition, the voting is done at a meeting of creditors. Consumer proposals only have a meeting if one is specifically requested by at least 25% of a person’s debt in dollars. Division I proposals also require a hearing and must be approved by the court. Consumer proposals are deemed approved unless someone specifically asks for a hearing to be held. All of these extra meetings and hearings add up, so the costs associated with filing a Division I proposal may be quite high.
To return to the original question that was asked – what is the difference between a consumer proposal and a Division I proposal to creditors? The easiest thing to remember is that Division I proposals are used in complicated situations, with high levels of debt. For most people, a consumer proposal is the correct answer to deal with their debts.
If you’re considering filing a consumer proposal to deal with your debt or need more information about the process, contact a local Consumer Proposal Administrator to review all of your options.