Most people are familiar with the concept of bankruptcy. Creditors are owed money, assets are liquidated and the liquidation proceeds are paid to creditors. The process is usually very difficult for the person filing bankruptcy as his/her assets may consist of a family home or a cottage, which possibly has been in the family for generations. The disruption can be devastating for the family and their children.
The Bankruptcy and Insolvency Act (BIA), the federal statute that governs bankruptcy and restructuring in Canada, provides an option other than bankruptcy.
The BIA allows an insolvent person whose aggregate debts are less than $250,000 (not including mortgages on residential property) to file what is known as a “consumer proposal”. A consumer proposal is not the same as bankruptcy, even though they are both governed by the same laws.
A consumer proposal is a formal settlement between a debtor and his/her creditors of all unsecured debts for an agreed upon amount. The settlement does not have to be for the full amount of all debts but can be for a fraction of the total owed. The debtor makes one monthly payment to the administrator of the proposal, who in turn makes dividend payments to the creditors.
More specifically, a person who is unable to meet their monthly debt payments meets with a qualified professional, who administers consumer proposals, and they discuss the ability of the debtor to make monthly payments. Together, they review the monthly income and expense statement of the debtor, as well as his/her net worth, to determine how much the debtor is able to pay each month. Once a monthly amount is determined the administrator notifies the creditors and helps to finalize a settlement agreement between the debtor and the creditors. Fifty percent (in dollar value) of the creditors must vote to accept the proposal for it to become binding on all.
The main difference between a consumer proposal and a bankruptcy is that in the case of the proposal the debtor’s assets are not liquidated. The debtor receives the same protection from creditors and collectors but retains control of his/her assets. The two obvious benefits are that there is no loss of assets and no family disruption.
One might ask “Well why don’t I just call all my creditors and work out my own settlement?” This will not necessarily work because, for example, if you have five creditors and you are able to settle with only three of them, the remaining two are not forced to settle. They can still pursue you for the amounts they are owed. In a consumer proposal, all creditors are dealt with together and receive the same payment plan. As consumer proposals are governed by federal law, any settlement is enforced by the courts and creditors are required to accept the settlement in full and final satisfaction of all debts. So the debtor gets to keep his/her assets, he makes monthly payments to satisfy all debts over time and the creditors receive payments, which are greater than what they would have received if the debtor had filed bankruptcy.
Consumer proposals comprise an increasingly large percentage of overall personal insolvency filings in Canada. For records ending November 30, 2010, 31% of all consumer insolvencies in Canada were consumer proposals.1 This is up dramatically from ten years ago when the majority filed for bankruptcy, having had no knowledge of the alternative.
In today’s economic environment, it’s important that people know what options they have to deal with debt. Canada’s insolvency laws mean that today, “Proposals are not just for marriage anymore”.
Originally published in the Spring 2011 issue of Comments.
1. Office of the Superintendent of Bankruptcy. Insolvency Statistics in Canada – November 2010. Retrieved 2011, from http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br02528.html
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.