A consumer proposal is a debt relief solution under the Bankruptcy & Insolvency Act available to individuals in Canada as an alternative to bankruptcy. There are, however, requirements and limits as to who is eligible to file a consumer proposal.
First, a consumer proposal only applies to an individual, not a corporation. If you are a sole proprietor or unincorporated business, you can still file a one as long as your total debts are within the maximum amount allowed.
Debt limit of $250,000 for individuals
An insolvent person is eligible to file a consumer proposal if their total debts, not including their mortgage on their home (principal residence), do not exceed the maximum allowable limit of $250,000.
For most individuals this limit is enough. In the event that your debts exceed the limit, it is still possible to make a proposal to creditors through something called a division I proposal.
Occasionally, an insolvent couple may decide to file a ‘joint’ consumer proposal together, to deal with not only joint debts but their individual debts as well. In this case, the limit for a joint consumer proposal is doubled to $500,000.
Division I versus consumer proposal
There is little difference in terms of outcome between a division I proposal or a consumer proposal. Both eliminate all unsecured debt, both provide immediate creditor protection, and both allow you to make a deal with your creditors to settle your debts for less than you owe.
The major differences between the two are administrative. A meeting of creditors is always held in a division I proposal, and must be held within 21 days of filing. In a consumer proposal, creditors can ask for a meeting within the 45-day voting period but a meeting is not mandatory.
Voting thresholds are also different. A consumer proposal is accepted if more than half of your creditors in terms of dollar value of debts accept your proposal terms. There is no requirement regarding the number of creditors voting must agree. That is why if you have one or two large creditors it is important to get these creditors on-side as they can sway the dollar value vote.
The voting requirements in a division I proposal are stricter. In a division I proposal, more than half of the number of creditors must accept your proposal and two thirds of the dollar value of creditor claims must be voted in favour of the proposal.
There is one other major difference from the debtor’s perspective. If a consumer proposal is rejected by creditors, the debtor can pursue other options such as continuing to pay their debts as is or they can consider bankruptcy as an alternative. If, however, a division I proposal is rejected, a debtor is automatically bankrupt, there is no other option.