Consumer and Ordinary Proposals
|This information applies to British Columbia, Canada. Last reviewed for legal accuracy by Alison Ward in August 2018.|
A proposal is an offer a debtor makes to their creditors to settle their debts. The offer can be to pay them a percentage of what is owed, to extend the time to pay them, or both.
- Client wants advice on repaying debts and has the financial ability to pay something toward all of them, but needs a lower overall monthly payment and additional time to pay.
Summary of the law
The federal Bankruptcy and Insolvency Act, in Part III, contains the provisions under which a debtor can make a proposal to all or a class of creditors (for example, only unsecured creditors) to pay off a percentage of their debts, after which the debtor will be discharged at law from owing the balance of the debts to those creditors.
The proposal provisions are not the same as an assignment in bankruptcy. Proposals are designed to provide an alternative to bankruptcy for those debtors who have some ability to pay on their debts. In a bankruptcy, the debtor gives up what they own to eliminate their debts. A proposal is aimed at the debtor who has some ability to pay on their debts, but who cannot pay off all their debts over a reasonable time because of the overall amount due relative to the monthly income available to make payments.
The Bankruptcy and Insolvency Act provides for two types of proposals: consumer proposals and ordinary proposals.
A consumer proposal can be made by an individual who has total debts of $250,000 or less (excluding money owed on a mortgage for the debtor’s house). Generally, a consumer proposal takes a maximum of five years to complete.
As with assignments in bankruptcy, the debtor must undergo counselling as part of the proposal process. Consumer proposals are administered by proposal administrators (trustees licensed under the Bankruptcy and Insolvency Act).
A proposal administrator first makes a full inventory of the debtor’s income and expenses, assets and liabilities, and creditors, and sets that information out in a proposal with the debtor’s offer of partial payment. The proposal is filed with the Superintendent of Bankruptcy’s office, which supervises proposals (and assignments in bankruptcy) for the federal government. Then that form, along with additional information, is immediately sent to all the creditors of the debtor.
Basically, the proposal to the creditors is that the debtor will pay them a percentage of the amount of money owed to them. For example, if the debtor owes all creditors $25,000, and the debtor and administrator feel that the debtor can pay $12,500 over five years to those creditors, each creditor would receive 50% of the amount owed to them during the five years that the payments are made.
Creditors have up to 45 days to accept or reject a consumer proposal. Creditors who do not respond are deemed to have accepted the proposal. If no creditor objects to the proposal within 45 days, the proposal is considered to have been approved by the creditors.
In some circumstances, the administrator must hold a meeting of creditors at which they vote on the proposal. The official receiver (a government official) might order the meeting of creditors, or it might be requested by creditors holding 25% or more of the “proven claims” (that is, debts for which they have filed claims with the administrator). For a proposal to succeed, a majority of the creditors (based on the amount owed) must approve. (The votes are based on the amount of money owed, so each creditor has as many votes as they are owed in dollars.)
If the proposal is accepted (either because there is no obligation to call a meeting of creditors or because the proposal is approved at a meeting of the creditors), the debtor begins making payments to the administrator, and the administrator then forwards payments to the creditors.
Debtors who have had their proposals accepted are protected from legal action or judgment enforcement action by all creditors covered by the proposal. Under the Bankruptcy and Insolvency Act, creditors covered by the proposal cannot start or continue legal actions against the debtor as long as the proposal is in force.
Within two months of a proposal being approved, the debtor will meet with the administrator for the first of two counselling sessions. The second counselling session is held within seven months.
The cost of a consumer proposal
The cost of a consumer proposal is approximately $1,500, plus GST and counselling fees. In addition, the debtor must pay a fee to the administrator equal to 20% of the moneys distributed to creditors, and a levy to the Superintendent of Bankruptcy equal to 5% of all the funds disbursed.
An ordinary proposal is available to insolvent individuals, families and businesses whose debts exceed $250,000. The process for obtaining approval of an ordinary proposal is similar to the process for obtaining approval of a consumer proposal, with some significant differences as follows:
- There is always a meeting of the creditors.
- A rejection of an ordinary proposal by creditors results in immediate bankruptcy as of the date of the creditors’ meeting.
- The proposal must be approved by a majority of the creditors, who represent at least two-thirds of the total dollar amount owed. If the proposal is accepted by the creditors, it must then be approved by the court.
- The fees for each case are decided individually and voted on by the creditors.
- There are no mandatory counselling sessions.
The advocate’s role with most debtors is to provide guidance for the most appropriate remedy to resolve the debt problem. This requires that the advocate obtain full details of the debtor’s income and expenses, and assets and liabilities. The financial situation of a spouse may also be relevant. It is important to review the debtor’s financial circumstances over both the short term and long term to assess whether a proposal or bankruptcy is a better option for the client.
Related topics and materials
See the other sections on getting out of debt:
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