What Are The Differences Between a Consumer Proposal and a Division 1 Proposal?
Many people are surprised to discover that Insolvency Trustees are able to offer two different types of proposals through the Bankruptcy Insolvency Act. The first of these is the commonly-known Consumer Proposal, and the second is called a Division 1 Proposal.
What are the differences?
…and why would someone select one type of proposal over another?
Details of a Consumer Proposal
A Consumer Proposal is available toindividual debtors whose total debts do not exceed $250,000 (excluding the mortgage on their principal residence). When someone files a Consumer Proposal, their Insolvency Trustee will analyze the value of their assets, the size of their debt load, and the amount of net household income coming to arrive at an amount the Trustee feels the Creditors will accept. This is normally a percentage of what you owe them, payable over a specific period of time (normally five years). All payments are made as a single monthly payment to the Insolvency Trustee, and he/she distributes those funds (as a dividend payment) to the various creditors.
Compared with the Division I proposal (see below), a Consumer Proposal is a simplified process. A Consumer Proposal is available to individuals only. There is no interest mounting during the term of the Consumer Proposal and no additional costs levied for Trustee involvement.
Details of a Division 1 Proposal
The second Proposal available to be filed is called a Division I Proposal. Like a Consumer Proposal, this is a formal procedure overseen by the Trustee and the Bankruptcy and Insolvency Act. This type of Proposal is available to businesses and individuals — there is no limit with respect to how much money is owed (other than the amount owing must be over $250,000). As with a Consumer Proposal, in a Division I proposal, you work with one of our Insolvency Trustees to put together an offer to pay your creditors a percentage of what you owe them over a specific period of time. And just like the Consumer Proposal, all payments are made through the Insolvency Trustee, and the Trustee uses those funds to pay each of your creditors
Comparison of a Consumer Proposal vs a Division 1 Proposal
Let’s take a look at a breakdown of the similarities and differences between a Consumer Proposal and a Division 1 Proposal, so you can determine which type of Proposal would be best for your situation:
|Consumer Proposal||Division 1 Proposal|
|Must be less than $250,000 in debt.||Must be more than $250,000 in debt.|
|Available only to individuals.||Available to individuals, receivers, a liquidator of an insolvent person’s property, a bankrupt, or a Trustee of the estate of a deceased bankrupt.|
|Once electronically filed with the Federal Government, protection is in place immediately. Creditors notified within 5 business days.||Once electronically filed with the Federal Government, protection is in place immediately. Creditors notified within 5 business days.|
|Not Applicable.||The Trustee must file a statement indicating the projected cash flow of the insolvent.|
|Once filed, unsecured creditors have 45 days to vote for or against the proposal or put forward a counter-offer. If approved by the majority of creditors, the Proposal gains deemed court approval 15 days later.||A mandatory Meeting of Creditors is set up by the Trustee at the time the Proposal is filed. This Meeting of Creditors shall be held within 21 days of the filing of the Proposal. At the meeting of creditors, the Trustee will present the Creditors with a report on the statement of the insolvent person’s business and financial affairs. The Creditors then vote in favor or rejection of the Proposal.|
|The Trustee will present the creditors with an estimate of what they would realize in a bankruptcy, compared to the amount they would receive in the proposal.||The Trustee will present the creditors with an estimate of what they would realize in a bankruptcy compared with the amount they would receive in the proposal.|
|The settlement offer must be “sweeter” than the creditors would receive in a Bankruptcy.||The settlement offer must be “sweeter” than the creditors would receive in a Bankruptcy.|
|If the Proposal is rejected, the debtor may opt to file a Bankruptcy, or attempt to settle with the creditors directly in an informal manner.||If the Proposal is rejected at the Meeting of Creditors, the debtor is automatically bankrupt.|
|2 mandatory counseling sessions must be attended during the Consumer Proposal (the first within 60 days, the second within 210 days).||Counseling sessions are not required in a Division 1 Proposal.|
|No monthly income statements required.||No income statements required once filed.|
|Tax refunds go to the debtor.||Tax refunds go to the debtor.|
|Finishing the Proposal can take 1-5 years. Paying down the proposal earlier is recommended and welcomed.||A Division 1 Proposal is normally a five-year process, but the length can differ. Paying down the proposal earlier is recommended and welcomed.|
|If three payments are missed, the Consumer Proposal is considered “annulled”. Protection is immediately lifted and the creditors have the legal right to pursue the amounts owing to them.||In a Division 1 Proposal, if in default the protection is lifted and creditors have the legal right to pursue amounts owing to them.|
|Paying down the Proposal earlier is the ideal solution – no penalties, no interest, and once completed the credit rating can begin to improve.||Paying down the Proposal earlier is the ideal solution – no penalties, no interest, and once completed the credit rating can begin to improve.|
Proposal vs Bankruptcy
If we compare either type of Proposal to a Bankruptcy, the major advantage of the Proposals is that you retain all of your assets. Like a Bankruptcy, in either Proposal all actions launched against you by unsecured creditors (such as wage garnishments or frozen bank accounts) will be stayed (stopped). And once your creditors have agreed to your settlement offer, the dollar value of the settlement cannot change – even if you increase your monthly income, win the Provincial lottery or inherit a large sum of money from a distant relative.
Information provided by Farber Licensed Insolvency Trustees. Original post