Filing a Consumer Proposal in Ontario
An Alternative to Personal Bankruptcy
The first option often contemplated by a financially distressed individual is filing for bankruptcy. Although this provides relief from creditors, this option has some disadvantages, including the hit to your credit rating, the social and professional stigma, and that you give up your assets. That can become particularly important if you have substantial equity in your home.
Given the above points, it would be prudent to consider an alternative to bankruptcy when possible. The best alternative is called a “proposal” to creditors.
What is a consumer proposal and how is one created?
Simply put, a proposal to creditors is a formal repayment plan governed by the Bankruptcy and Insolvency Act. Assuming the debtor’s total debts do not exceed $250,000 (this threshold excludes mortgage debt on a residential home), a licensed insolvency trustee will help determine what you (the debtor) can afford to pay and what the creditors will accept.
The consumer proposal offers a viable and attractive alternative to bankruptcy and has been steadily gaining popularity over the past several years:
- From a creditor’s standpoint, a consumer proposal is advantageous in that creditors will receive more money in a proposal than in a bankruptcy.
- From the debtor’s standpoint, it offers flexibility in that a repayment plan can be tailored to the debtor’s ability to pay. It also minimizes the credit rating impact.
- From a social perspective, the consumer proposal process enables the debtor to settle with creditors and encourages personal responsibility for the repayment of debts.
The trustee will work with you in drafting a proposal to your creditors. The first consideration is what you can afford to pay. Will you have enough income to pay into the proposal after your living expenses? What assets can you voluntarily sell, or other assistance (e.g. friends and family) can you secure?
The trustee then files the proposal with the Office of the Superintendent of Bankruptcy, a division of the federal government that monitors bankruptcy and insolvency proceedings in Canada. Upon filing the proposal with the OSB, creditors are legally stopped from taking any action you or your property.
The consumer proposal and the debtor’s financial information are sent to the creditors for their review. A document called a voting letter, which allows a creditor to indicate its vote, is also sent. Creditors are required to file with the trustee a proof of claim and completed voting letter before their claim can be registered for voting on the consumer proposal.
45 days after the consumer proposal was filed with the OSB, the trustee will compile and review the voting letters received. There are 3 possible scenarios:
- If no voting letters were received, the creditors are deemed to have accepted the consumer proposal.
- If those creditors voting “no” comprise less than 25% of the value of claims filed, the creditors are deemed to have accepted the consumer proposal.
- If those creditors voting “no” comprise more than 25% of the value of claims filed, the trustee is required to hold a meeting of creditors. Creditors will usually vote “no” because they want more money. Therefore, a meeting of creditors would be held to discuss what the debtor would have to offer in a consumer proposal before it would be accepted by the dissenting creditor(s).
What happens when the proposal is accepted by the creditors?
Once the creditors have accepted the consumer proposal, there is a 15-day waiting period that allows any interested parties (e.g., creditors, the trustee, or the OSB) to request that the bankruptcy court review the consumer proposal. Once that 15-day period expires, the consumer proposal is deemed to be accepted by court.
If the consumer proposal is not approved by the creditors and the court, you (the debtor) are essentially in the same position you were in prior to filing – at the mercy of your creditors. In that event, you may have to consider filing for bankruptcy.
The consumer proposal payments are made to the Trustee, who holds the money in trust and distributes the proceeds to creditors – usually on an annual or semi-annual basis. The payments can be made over a maximum period of 60 months and most debtors will usually make monthly payments to pay their proposal in full. However, a debtor can pay off a proposal sooner if he or she wishes through accelerated payments to the Trustee or with a lump sum payment.
What are the consequences of filing a consumer proposal in Ontario?
For each loan account included in the consumer proposal, a debtor’s credit rating will be downgraded to an “R9” rating with the credit bureau during the performance of the consumer proposal. Once the consumer proposal is completed, the credit rating will be upgraded to “R7”, and will so remain for 3 years. After 3 years, the R7 is deleted from the debtor’s credit file.
If the debtor fails to complete the consumer proposal, then as with a proposal being rejected they are essentially in the same position they were prior to filing – at the mercy of his creditors and with a bankruptcy filing as a possible next step.
The consumer proposal offers a viable and attractive alternative to bankruptcy. It gives you more control over which assets you can keep and which you may have to sell, tailors a plan to your ability to repay, and works with creditors to find a plan they can accept.