A proposal is an offer to your creditors to settle your debts and is administered by a Trustee or an Administrator under the provisions of the Bankruptcy and Insolvency Act. The advantages of a proposal are that:
- a proposal, if accepted by your creditors, allows you to settle your debts without going bankrupt, and
- a proposal will generally affect your credit rating for a shorter period of time than a bankruptcy.
There are two types of proposals under the Bankruptcy and Insolvency Act. A consumer proposal is used if you have less than $250,000 of debt, excluding the mortgage on your principal residence. A Division I proposal is used in those cases where you do not qualify for a consumer proposal.
An approved consumer proposal is binding on all unsecured and secured creditors who file provable claims under the consumer proposal. A consumer proposal can be approved in two ways:
- it is deemed to be approved 45 days after filing the consumer proposal if less than 25% of the creditors, who have filed claims, have requested a meeting, or
- it is approved if 50% of the creditors with proven claims, at a meeting of creditors to consider the proposal, vote in favour of it.
If a consumer proposal is not approved, you will not automatically be bankrupt.
An approved Division I proposal is binding on the unsecured creditors and all classes of secured creditors who have voted in favour of it. There must be a meeting of creditors to consider the Division I proposal and to vote on its acceptance or rejection. In order to have the Division I proposal approved, the unsecured creditors must vote in favour of its approval by a majority of the creditors (by head count) and by two-thirds of the amount of the creditors' claims (in dollars). If the unsecured creditors reject the proposal, you will be deemed to have filed an assignment in bankruptcy and will immediately become bankrupt.
Generally for creditors to vote in favour of a proposal the proposal should offer the creditors something better than they would receive if you went bankrupt. Even if the proposal offers something better than bankruptcy, the creditors will not always vote in favour of it and, in some instances, the significant creditors will request improved proposal terms in order to obtain their favourable vote.
A proposal for an individual is generally structured to provide a manageable monthly payment to the Trustee who then distributes the net funds to your creditors. Occasionally, a proposal will include a lump-sum settlement. The proposal could also include provisions whereby you sell some of your assets and pay the proceeds to the Trustee for your creditors. In reality the proposal can be anything that works for you and is acceptable to your creditors.
In order to structure a proposal, you will need to consult with a Trustee to discuss your current situation, assets and creditors.