An arrangement you negotiate with your creditors to repay a portion of what you owe is a proposal to creditors. In the law context, a “proposal” is a plan to settle your debts for a sum that is less than their whole amount.
One possible alternative to declaring bankruptcy is to propose to the creditors. There is usually negligible or no money left for the debtor’s creditors. When you make a proposition, the individuals you owe money to will receive something in return. Creditors are willing to entertain a suggestion because they believe that doing something is preferable to doing nothing.
Now that you understand the concept of a proposal to creditors, we will discuss the two types of proposals available to Canadian residents under the Bankruptcy and Insolvency Act (BIA). The first option is known as a consumer proposal. In contrast, the second is referred to as a Division I proposal to creditors.
Consumer Proposal for Clients With Debts Up to $250,000
In 1992, Canada amended the Bankruptcy and Insolvency Act to include consumer proposal provisions for the sole purpose of helping individuals cope with their obligations.
You may be eligible for a consumer proposal if you owe less than $250,000 in unsecured debts (excluding your primary dwelling mortgage). A consumer proposal filed by a married couple may include up to $500,000 in debt, not including mortgages.
You cannot submit a consumer proposal if your overall debt is more excellent than this threshold.
Proposal for Division 1: Individuals and Corporations
Under the Bankruptcy and Insolvency Act (BIA), a company or individual can submit a Division I application to reorganize their obligations.
Due to these differences, a Division I proposal is significantly more involved and expensive than a consumer proposal. Those with unsecured debts of less than $250,000 can file a Division I proposal. Still, most opt for the more consumer-friendly consumer proposal.
Consumer Proposals and Division 1 Proposals: Key Differences
While both programs can put a stop to collection efforts and wipe off unsecured debt, there are significant variances in the costs to participants:
- If creditors reject a consumer proposal, the consumer has more leeway to pursue other options. Rejection of a Division I plan constitutes an admission of bankruptcy. With a consumer proposal, there is no immediate bankruptcy if you cannot agree with your creditors.
- Your consumer proposal will become legally binding on your unsecured debts once you have received votes of approval from creditors representing a simple majority of the total amount owed to you. A majority in the number and the financial worth of a person’s obligations is needed to approve a Division I proposal. A smaller percentage of votes is required to support a consumer proposal.
- Division I proposals require creditors’ meetings. Consumer proposals require creditors’ meetings only if at least 25% of the debtor’s total monetary debt requests one. Unless an appointment is necessary, consumer proposals will be assumed to be approved.
- Consumer proposals allow for more liberal default conditions. A consumer proposal annuls a debtor’s debt three months behind on their payments. Creditors can now go after you for the original debt plus interest that the stay protecting you from them has been lifted. If the debtor in a Division I plan falls into default, they may raise the holiday until the debtor returns to court to approve the revised conditions.
Consumer Proposal vs. Division 1 Proposal in Toronto
Bankruptcy has a negative connotation, yet it is often seen as a last resort when a person’s or company’s financial situation has worsened to an extreme degree.
A consumer or Division I proposal can be a less drastic option (sometimes a commercial proposal). All of these alternatives involve using the services of a licensed insolvency trustee (LIT), much like in a bankruptcy. About the provision of the Bankruptcy and Insolvency Act that controls these procedures, the phrase “Division I” is used.
Contrary to what happens in a bankruptcy case, your assets will not be liquidated or seized if you file a proposal. While submitting a proposal could be advantageous for particular businesses or people, they must have the means to do so.
Are Division 1 Proposals Better Than Consumer Proposals?
Why would an individual submit a Division I proposal if it is more complex and expensive? A Division I proposal is the only method to avoid bankruptcy if your unsecured obligations (credit cards, lines of credit, and bank loans) total more than $250,000. You need the protection offered by the Bankruptcy and Insolvency Act (BIA).
Division I proposals typically have a five-year duration, though this may be extended under exceptional circumstances. On the other hand, you must finalize a consumer proposal in no more than five years. Both of these plans provide an early payoff option.