We talk a lot about consumer proposals however the Bankruptcy and Insolvency Act offers two discreet options for insolvent individuals who decide that a proposal is the best solution for addressing financial woes but want to avoid declaring bankruptcy. They are:
- Consumer proposal
- Division 1 proposal
Consumer Proposal Has Debt Limit
The first is the well-known consumer proposal. Here, a trustee works with individuals to determine, according to their debt load, assets and monthly income, a reduced payment plan (that is you pay off less than you owe) that would prove satisfactory to creditors.
With a consumer proposal however, debts cannot exceed $250,000 (not including a mortgage on their principal residence).
Payments are usually made over a period of time (up to 5 years), no interest accumulates, and the trustee levies no additional costs over the course of this period.
Division 1 Proposal
A Division 1 proposal is a considerably more complicated beast.
Also a formal arrangement that’s overseen by the trustee who distributes payments to creditors over a set period, a Division I Proposal distinguishes itself for being
- available to individuals and to businesses
- applicable to cases where your personal debt exceeds $250,000.
Where a consumer proposal isn’t applicable in situations where the total debt exceeds $250,000, the opposite is true for a Division I proposal. Here, the debtors can avail themselves of this option only if they are at least $250,000 in debt.
When a Division I proposal is filed, the trustee sets a meeting of creditors to be held within 21 days. Here, the trustee will present a report on the debtor’s financial condition, and the creditors will vote to accept or reject the proposal. If the unsecured creditors reject it, the debtor is automatically put into bankruptcy. That represents the single biggest threat for an individual participating in a Division I proposal, as opposed to a consumer proposal.
But, just like a consumer proposal, assuming your creditors say yes, and agree to your settlement offer, the terms are set. That means the dollar value of the division I settlement cannot be adjusted — even if your long-lost uncle keels over and leaves you the sole beneficiary of a fantastic fortune.
As part of your initial assessment, a trustee will enquire about how much you owe and the types of debts you carry. From this, and other information, they will provide you with a recommendation as to your options — including whether or not you qualify for a consumer proposal or a division 1 proposal.