| For the financially distressed individual (referred to as | | | | - If those creditors voting “no” comprise less |
| the “debtor”), the first option often | | | | than 25% of the value of claims filed, the creditors |
| contemplated is filing for bankruptcy. Although the | | | | are deemed to have accepted the proposal. |
| debtor will find relief from his creditors, this option | | | | - If those creditors voting “no” comprise |
| has some disadvantages: | | | | more than 25 percent of the value of claims filed, the |
| - Upon filing bankruptcy, the debtor’s credit | | | | trustee is required to hold a meeting of creditors. |
| rating goes to an “R9” with the credit bureau | | | | Creditors will usually vote “no” because they |
| and remains so for 6 years after the debtor is | | | | want more money. Therefore, a meeting of creditors |
| discharged from bankruptcy. | | | | would be held to discuss what the debtor would |
| - With some exceptions, the debtor’s assets | | | | have to offer in a proposal before it would be |
| become property of the bankruptcy trustee. This | | | | accepted by the dissenting creditor(s). |
| becomes a particularly important issue if the debtor | | | | 6. Once the creditors have accepted the proposal, |
| owns a home with substantial equity. | | | | there is a 15-day waiting period that allows any |
| - Although attitudes are changing, there is still a | | | | interested parties (e.g., creditors, the trustee, or the |
| stigma attached to the concept of filing for personal | | | | OSB) to request that the bankruptcy court review |
| bankruptcy. | | | | the proposal. Once that 15-day period expires, the |
| Given the above points, it would be prudent to | | | | proposal is deemed to be accepted by court. |
| consider an alternative to bankruptcy when a debtor | | | | 7. If the proposal is not approved by the creditors |
| is dealing with creditors. The best alternative is called | | | | and the court, the debtor is essentially in the same |
| a “proposal” to creditors. | | | | position he was prior to filing – at the mercy of |
| What is a proposal? | | | | his creditors. In that event, he may have to consider |
| Simply put, a proposal to creditors is a formal | | | | filing for bankruptcy. As mentioned, the above |
| repayment plan governed by the Bankruptcy and | | | | scenario applies if a debtor’s non-mortgage debt |
| Insolvency Act. Assuming the debtor’s total | | | | does not exceed $250,000. This type of proposal is |
| debts do not exceed $250,000 (this threshold | | | | called a “Consumer Proposal”. If debts |
| excludes mortgage debt on a residential home), the | | | | exceed $250,000, the process is somewhat more |
| steps in the proposal process are as follows: | | | | complex, and will be the subject of a future article |
| 1. The debtor initially seeks the assistance of a | | | | – “Division I Proposals – Let’s Make |
| trustee in bankruptcy to answer the following | | | | a Deal, Part 2”. |
| questions: | | | | What are the consequences of filing a proposal? |
| - Will the debtor be able to fund a proposal? That is, | | | | A debtor’s credit rating will be downgraded to an |
| does he have adequate income to pay into a | | | | “R9” rating with the credit bureau during the |
| proposal after his/her living expenses? Or | | | | performance of the proposal. Once the proposal is |
| alternatively, can he fund the proposal by voluntarily | | | | completed, the credit rating will be upgraded to |
| liquidating his assets or obtaining the financial | | | | “R7”, and will so remain for 3 years. After 3 |
| assistance of friends/family? | | | | years, the R7 is deleted from the debtor’s credit |
| - How much should be offered in the proposal; what | | | | file. |
| can the debtor afford to pay and what will the | | | | If the debtor fails to complete the proposal, then he |
| creditors accept? | | | | is essentially in the same position he was prior to filing |
| 2. The trustee will work with the debtor in drafting a | | | | – at the mercy of his creditors. In that event, he |
| proposal to his creditors. | | | | may have to consider filing for bankruptcy. |
| 3. The proposal is then filed with the Office of the | | | | Conclusion |
| Superintendent of Bankruptcy (a division of the | | | | The proposal offers a viable and attractive |
| federal government that monitors bankruptcy and | | | | alternative to bankruptcy and has been steadily |
| insolvency proceedings in Canada). Upon filing the | | | | gaining popularity over the past several years: |
| proposal with the OSB, creditors are legally stopped | | | | - From the debtor’s standpoint, it offers flexibility |
| from taking any action against the debtor or his | | | | in that a repayment plan can be tailored to the |
| property. | | | | debtor’s ability to pay. It also minimizes the |
| 4. The proposal and the debtor’s financial | | | | impact on his credit rating. |
| information are mailed to the creditors for their | | | | - From a creditor’s standpoint, a proposal is |
| review. A document called a voting letter, which | | | | advantageous in that creditors will receive more |
| allows a creditor to indicate its vote, is also sent. | | | | money in a proposal than in a bankruptcy. |
| Creditors are required to file with the trustee a proof | | | | - From a social perspective, the proposal process |
| of claim and completed voting letter before their | | | | enables the debtor to settle with creditors and |
| claim can be registered for voting on the proposal. | | | | encourages personal responsibility for the repayment |
| 5. At the end of the 45-day period after the proposal | | | | of debts. |
| was filed with the OSB, the trustee will compile and | | | | If you are a resident of Toronto, Ontario, Canada |
| review the voting letters received. There are 3 | | | | and are considering filing for a bankruptcy Toronto |
| possible scenarios: | | | | proceeding to deal with your debt such as a |
| - If no voting letters were received, the creditors are | | | | Consumer Proposal, please contact Victor directly. |
| “deemed” to have accepted the proposal. | | | | © Copyright Fong and Partners Inc 2009. |