Dealing With Debt - Understanding the Two Types of Proposals
DIVISION I or “ORDINARY” PROPOSALS
Is used for consumer debtors who have in excess of $250,000 of debts, excluding the mortgage on their principal residence.
The process can be commenced in two ways:
The filing of a Notice of Intention to Make a Proposal (the “NOI”) followed by the filing of the actual Proposal, or
The filing of the actual Proposal without having first filed an NOI.
The NOI is typically filed when it is necessary to stop or “stay” all creditor actions in order to have some breathing room to consider the Debtor’s affairs prior to formulating the terms of a Proposal. Once the NOI is filed, there is an initial 30-day stay of proceedings that stops all unsecured creditor actions. Secured creditor enforcement actions are also stayed (stopped) as long as the secured creditor has not previously issued a 10-day Notice of Intention to Enforce Security (“NITES”) and the 10-day notice period has expired prior to filing the NOI.
If an NOI is filed, the Proposal must be filed within the 30-day period after the NOI filing or, an application must be made to the Court for a further extension of up to 45-days. Multiple extension applications may be made but the total of all extensions, including the initial 30-day stay, cannot exceed 6-months from the date of the initial NOI filing.
In the event that, within the initial 30-days after an NOI is filed, no Proposal is filed or no extension application is made to Court, the debtor will be deemed to have filed an assignment in bankruptcy. An NOI cannot be withdrawn once it has been filed.
The terms of a Proposal can be as simple or creative as the circumstances require, bearing in mind that the objective is to get the creditors to accept it. Most Proposals by consumer debtors will be based on fixed monthly payments for a period of time, typically up to 5 years. Regardless of what payments terms are included in the Proposal, all payments must be made to the trustee who will make the distributions to the creditors on a periodic basis.
A Proposal for a consumer debtor typically deals with the debtor’s unsecured creditors. Secured creditors are only dealt with to the extent that the debtor wishes to retain the collateral (a house or car) held by the secured creditor or release it. If the collateral is retained then the debtor will have to continue paying the secured creditor. If the collateral is not retained, the secured creditor can then seize and sell it and then file an unsecured claim in the Proposal for any deficiency that it suffers.
A Proposal should provide a recovery to the unsecured creditors better than what the unsecured creditors would receive in a bankruptcy or there would be no incentive for them to vote in favour of the Proposal.
In order for the Proposal to be approved, it is necessary for more than 50% (voting by dollar-value of claims) and more than two-thirds (by head-count, one vote for each creditor) to vote for the acceptance of the Proposal.
It is not unusual for one or more creditors to object to the terms of the Proposal and put forth counter-proposals. These situations are unique to each Proposal and need to be evaluated and dealt with. Sometimes it may be necessary to amend the terms of the Proposal in order to get it accepted but such amendments are only done with the consent of the debtor. An adjournment of the meeting may be necessary in order to understand the objecting creditor’s concerns and attempt to negotiate an acceptable amendment to the Proposal. If the Proposal, or an amended Proposal, is not approved, the debtor will be deemed to have filed an assignment in bankruptcy. An accepted Proposal must then be sent to the Court for final approval. A Court-approved Proposal, or amended Proposal, is binding on all creditors affected by the Proposal, including those that voted against it and those that did not have their claims filed prior to the commencement of the meeting to consider the Proposal.
After the Proposal is approved, the trustee will monitor its performance and whether any default has occurred. Default terms are usually described in the actual Proposal and there are limited provisions for curing defaults. If the default is not cured, the trustee must notify the creditors of the default and then proceed to get discharged as trustee. Once discharged, the creditors’ rights to pursue the debtor would be revived.
If the all of the terms of the approved Proposal are completed, the trustee will issue a Certificate of Full Performance and the debts in the Proposal will then be considered to have been settled.
DIVISION II or “CONSUMER PROPOSAL”
A Consumer Proposal is a proposal to settle debts than can only be filed by a consumer (individual person) who owes less than $250,000, excluding the mortgage on the debtor’s principal residence. Business debts for a sole proprietor or business debts related to guarantees of corporate business debts and director liabilities can also be included as long as the total is less than the $250,000 threshold.
The Consumer Proposal process is more streamlined than the process for a Division I Proposal. No Notice of Intention (NOI) can be filed in this process and it is started with the filing of the Consumer Proposal and related documentation.
The Consumer Proposal needs to offer something better to the creditors than they would receive in bankruptcy. Also, our comments above regarding inclusion or exclusion of secured creditors are equally applicable in a Consumer Proposal.
There is no mandatory meeting of creditors in a Consumer Proposal. The Consumer Proposal is filed and, if no meeting of creditors is requested within 45-days after filing (by at least 25% of creditors with filed claims) then the Consumer Proposal is approved. If a meeting is requested, it will typically be held within 30-days after the expiry of the initial 45-day period. At that meeting, the Consumer Proposal will be approved if more than 50% (voting by dollar-value of filed claims only) of the unsecured creditors vote in favour of its acceptance. As with a Division I Proposal, there could be a negotiation with one or more creditors to amend the terms of the Consumer Proposal before it is actually voted on and this negotiation may, or may not, require an adjournment of the meeting.
If the Consumer Proposal is not approved, unlike a rejected Division I Proposal, the debtor does not automatically become bankrupt. A Consumer Proposal cannot exceed 5 years in term while a Division I Proposal can exceed 5 years. In a Consumer Proposal, the debtor must attend two mandatory counseling sessions but this is not required in a Division I Proposal.
Once approved, the debtor needs to fulfill the terms of the Consumer Proposal. The debts are not settled until the terms of the Consumer Proposal and the counseling sessions are fully completed. The trustee will typically make distributions to the creditors every three months during the term of the Consumer Proposal and then will issue a Certificate of Full Completion at the end of the process. The issuance of this certificate causes the debts to be settled subject to some exceptions that, if applicable, will be discussed with the trustee prior to the actual filing of the Consumer Proposal.
A default will occur under the terms of the Consumer Proposal if a total of more than 3 monthly payments are in arrears or if any payment due less frequently than monthly is more than 3 months past due. There is a limited ability to revive a Consumer Proposal that has gone into default. If it is not revived, the trustee will distribute the balance of the funds on-hand and then will seek the trustee’s discharge from the file. Once the trustee is discharged from the administration of a defaulted Consumer Proposal, the rights of creditors to pursue the debtor will be revived.
CREDIT BUREAU IMPLICATIONS
Regardless of which version of a proposal is filed, a proposal will stay on your credit bureau from the time of filing up to 3 years after the Certificate of Full Completion is issued. So, if a proposal includes payments over a 5-year period and the payments are not made early, the proposal will be on your credit bureau for 8 years in total.
Most proposals that provide for fixed monthly payments can be paid early and this can shorten the impact on your credit bureau. For instance, if the proposal provides for payments of $12,000 by way of 60 monthly payments of $200 each, as soon as the $12,000 is paid (and counseling sessions completed, if any) the proposal will be completed and that will start the three year clock ticking for when the proposal falls off of your credit bureau report.
By comparison, if you went bankrupt for the first time, the bankruptcy will be recorded on your credit bureau for 7 years after discharge from bankruptcy which typically occurs between 9 and 21 months after filing for bankruptcy. For a second time bankrupt, the bankruptcy will be recorded for 14 years after discharge which typically occurs between 24 and 36 months after filing for bankruptcy.
For a second time bankrupt, a proposal can make sense just from a credit bureau perspective as it will only stay on your credit bureau for 3 years after completion regardless of whether or not you have been previously bankrupt.
Powell Associates Ltd. is a Licensed Insolvency Trustee (LIT) focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses. We offer free consultations to review your personal financial situation and practical debt resolution options. Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth - it's your choice.