Commercial (Division I) Proposal vs. Consumer Division II) Proposal in the Edmonton Region

Debt is a debilitating problem that many Canadians are finding themselves stuck in. From mortgages to auto loans, to payday loan shops – the average person may find themselves without a solution. However, the Bankruptcy and Insolvency Act allows Canadians to consolidate and reduce the burden of unsecured debts through Division I Proposals (Commercial Proposal) and Consumer Proposals (Division II Proposal).

What is a Division I Proposal (Commercial Proposal)?

A Division I Proposal is an agreement that, if approved by both the creditors and the Court, becomes a legally binding document between an individual and his or her creditors. When a Division I Proposal is filed, the outcome often gives creditors more than they would receive in a bankruptcy filing and helps an individual settle some of their financial burden.

Insolvent corporations that owe any amount of secured debt, as well as individuals with a total amount of consumer debt over $250,000 (not including the mortgage on their home), can file a Division I Proposal. According to the Office of the Superintendent of Bankruptcy Canada, a Division I Proposal may be filed by “someone who is insolvent, a receiver appointed by a secured creditor, a liquidator of an insolvent person’s property, someone who is bankrupt, or a Licensed Insolvency Trustee of the estate of a bankrupt”.

When an individual files a Division I Proposal and it is accepted, they usually continue to manage all of their assets. Additionally, any actions against them, such as wage garnishments, will be stayed. Division I Proposals allow debtors to pay off a portion of their unsecured debts if the proposal is approved by 2/3 of the creditors. Businesses can benefit from this as it allows them to remain in business without declaring bankruptcy.  Should creditors not approve of a business or individual proposal by a 2/3 vote the debtor is adjudged bankrupt.

Filing a Division I Proposal will be disclosed in any credit bureau report. Once the proposal is filed, your credit rating may be recorded as a R9, which means the debt is in ‘write off’ category. This, in turn, will make it difficult to get a loan in the future. However, individuals that are looking to file a Division I Proposal are usually considering it as a last resort, so their credit rating is likely already adversely affected. 

If an individual or corporation wishes to file a Division I Proposal, a Licensed Insolvency Trustee will analyze the cash flow and determine what amount is available to pay their creditors. Once the proposal is filed, a stay of proceedings put in place relative to creditor collection action. 

Moving forward, the Trustee will file a statement, and within 21 days, the creditors meet and vote on the proposal. If the proposal is rejected the individual or corporation is adjudged bankrupt.  

But if a Division I Proposal is accepted, an individual or corporation can take up to 5 years to pay. However, it is advised to pay down the proposal as soon as possible. If the individual that filed the proposal defaults on any part, for any reason, creditors may pursue them for the money owed upon application to the court. 

What is a Consumer Proposal (Division II Proposal)?

A Consumer Proposal is very similar to a Division I Proposal in that an individual will look to file a proposal in place of filing for bankruptcy. The proposal is administered by a Licensed Insolvency Trustee, who helps the debtor develop and offer to pay off a percentage of their debts, extend the time to pay, or both. A Consumer Proposal cannot have a term longer than 5 years.

In order to qualify to file for a Consumer Proposal, the individual must have a total amount of consumer debt amounting to less than $250,000. This amount does not include any secured debts, such as mortgages on one’s principal residence. The debtor must also have a stable source of income but is insolvent and unable to pay outstanding, unsecured debts.

The upside to filing a Consumer Proposal is when it is filed, interest stops immediately on the principal amount owed. The proposal acts similarly to a Division I proposal, in that the total amount of debt owed may be dramatically reduced and the debtor is given up to 5 years to pay. Additionally, the debtor is protected against creditors and they cannot garnish wages or seize assets. The payments depend largely on the individual’s income, the amount contributed to any family living expenses, and the quantum of debt. 

Like a Division I Proposal, a Consumer Proposal will affect an individual’s credit rating. It has the effect of changing the credit bureau rating to R7 as opposed to R9 for bankruptcy.

An individual must engage a Licensed Insolvency Trustee who assists in the preparation of the proposal. Once filed, the creditors are given 45 days to accept or reject the proposal. If one of the creditors is owed at least 25% of the total value of proven claims, they may request a meeting of the creditors to discuss the proposal and vote on accepting or refusing it at a meeting.  A Consumer Proposal requires a majority creditor approval otherwise the proposal is rejected. A debtor may consider filing for bankruptcy if their Consumer Proposal is rejected by the creditors.

Adding Tools to Your Debt Reduction Toolbox

Anybody can manage their finances with a little bit of effort. Canadians have lots of resources available to them to help balance budgets and change their debt path. 

A. C. Waring & Associates Inc. can help you make a plan to get out of your financial difficulties.  Call us now and get started.