Can I File A Consumer Proposal If I'm Bankrupt?

2017-05-17   minute read

Mary Plahouras


Consumer Proposal

The Bankruptcy and Insolvency Act (the “BIA”) governs the criteria for filing a Consumer Proposal under the BIA. A Consumer Proposal can be made by:

  1. An individual who is insolvent; or
  2. A bankrupt.
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A Consumer Proposal can be for a maximum of five years. A Consumer Proposal is available to individuals with total debts of $250,000 or less, including a secured debt on an automobile but, excluding mortgages on the debtor’s principal residence. A joint Consumer Proposal can also be made where the debts of the individual debtors making a joint Proposal are substantially the same and the Licensed Insolvency Trustee (“LIT”) believes a joint Proposal is in the best interest of the joint debtors and the creditors. Where a joint Consumer Proposal is made, the threshold increases to $500,000.

If you are an individual who has filed a bankruptcy under the BIA and you have not been discharged from bankruptcy, you may opt to make a Consumer Proposal to your creditors. It’s important to note however, the Proposal must be filed before you are discharged from bankruptcy. Once you have been discharged from bankruptcy most, if not all, of your debts will have been released or “wiped out.”

Is A Consumer Proposal Right For You?

There are several benefits to making a Consumer Proposal to your creditors. Some of these benefits include the following:

  • Keeping control of your assets (in most situations) so long as you have and continue to maintained payments to your secured creditors.
  • A Consumer Proposal allows for terms to compromise non-dischargeable debts if such creditor votes in favour of the Proposal.
  • Unlike in a bankruptcy, if you are a director of a company, you can continue to act as director — you will not be required to resign as a director.
  • The impact on your credit rating will not be as severe as in a bankruptcy.
  • Unlike in a bankruptcy, where monthly payments may vary with income if you are required to make surplus income payments pursuant to the Superintendent of Bankruptcy (“OSB”) Standards, monthly payments to a Consumer Proposal do not vary with income.
  • The Consumer Proposal can be completed in less than five years by making higher monthly payments over a shorter period or alternatively, lower monthly payments over a longer period, to a maximum of five years.
  • Upon deemed creditor acceptance and deemed Court approval of your Consumer Proposal, you will not be subject to further inquiries from creditors.

In deciding whether to continue with your bankruptcy or make a Consumer Proposal to your creditors, the LIT will outline the challenges that you need to be aware of before you begin the process of filing a Consumer Proposal. For instance:

  • If inspectors have been appointment to your bankruptcy estate, a majority in number of inspectors must approve the filing of the Consumer Proposal.
  • Dividend distribution to creditors must be greater in a Consumer Proposal than what the creditors would otherwise receive in a bankruptcy. The only exception may be where there is justification for a lower offer.
  • You will need to determine whether a Consumer Proposal is an affordable and manageable option for you.
  • If a Consumer Proposal is made to creditors, any non-exempt assets that were in your bankruptcy and vested with the LIT for the general benefit of your creditors will re-vest with you and you may opt to use the re-vested assets to fund the Proposal, in whole or in part.
  • Your creditors will have 45 days from the date of your filing the Consumer Proposal with the OSB to vote for or against acceptance the Proposal.
  • Creditor acceptance of a Consumer Proposal requires a majority of proven creditors (i.e. 50% plus 1) in dollar value voting for acceptance of the Proposal.
  • If your creditors vote for acceptance of the Consumer Proposal, your bankruptcy will be annulled effective the deemed Court approval date of your Proposal. The deemed Court approval date occurs 15 days after the deemed creditor acceptance date of the Proposal.
  • Post-bankruptcy debts (i.e. debts incurred after the date of filing your bankruptcy) cannot be included in your Consumer Proposal. For instance, if you obtained a new payday loan or if you received a new credit card after your bankruptcy was filed, the new loan or credit card charges cannot be included in your Proposal. You will be required to pay these debts in the ordinary course.
  • If your Consumer Proposal is deemed accepted by your creditors and deemed approved by the Court and there is a subsequent annulment of your Proposal due to a default in the terms of the Proposal (i.e. default in payment) the annulment of the Proposal will result in you reverting to bankruptcy.

What Can You Do Prior To A Deemed Annulment of Your Consumer Proposal?

If you are near default of the terms of your Consumer Proposal due to a material change in your personal / financial / employment situation, and before there is a deemed annulment of your Proposal, you may speak with the LIT about filing an amendment to your Proposal. The amendment may be for a reduction in (monthly) payment, a reduction in the number of (monthly) payments, or both. The amended Proposal must provide for a greater dividend distribution to creditors than what your creditors would otherwise receive in a bankruptcy.

Your creditors must approve the amended Consumer Proposal. If the amended Proposal is refused by your creditors, the original Proposal will be deemed to be annulled (i.e. you cannot revert to the original Proposal). The failure of creditors to approve the amended Proposal will result in you reverting to bankruptcy.

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