What is a Consumer Proposals (Division II Proposal)?
Consumer Proposals (“proposal”) are the main alternative to filing an assignment in bankruptcy. A consumer proposal is an arrangement between you and your creditors which enables you to pay a portion of your debts over an extended period of time. The amount that you pay and the length of time you pay this amount is determined in a consultation with a trustee in bankruptcy who acts as the Administrator of your consumer proposal and is based on the amount of your income living expenses and any other financial responsibilities you have. A consumer proposal is also called a “Debt Consolidation Arrangement”.
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Who is eligible for a proposal?
In order to file a Consumer Proposal, your debts must be less than $250,000 in total. Secured debts (mortgages on your principal residence and vehicle leases) are not included in this $250,000 figure, but all other debts must be included. If your debts exceed $250,000 you can still file a proposal, but it falls under the division 1 proposal rules, which are discussed in another section of our website.
How does a consumer proposal help me?
As soon as a consumer proposal is filed by the administrator, the rights of the creditors to start or continue any legal or collection procedures against you are suspended. In other words, if a creditor is threatening to garnish your wages or seize your assets, they will not be able to do so any longer, regardless of whether or not they have already started a legal action.
The filing of the consumer proposal gives you time to deal with your creditors over a long period of time – up to a maximum of five years. Interest stops immediately upon filing of the consumer proposal. It is quite normal that you and the administrator negotiate a reduction in the principal amount of the total debt, which is paid over the period of time – the length of which is negotiated with your creditors. Ultimately the amount that is payable each month and the number of months that this amount is payable is based on many factors such as:
1. your income
2. the income of other members of your family that is contributed to family living expenses
3. the value of any assets that you have that could be vulnerable to creditors if they reject the proposal (equity in house, cottage, boats, cash surrender value of life insurance, RRSP, RESP, etc.)
A variation of the “normal” proposal is to offer to the creditors a lump sum “advance” payment coming from refinancing your house (via a second mortgage) or borrowing against life insurance and adding a small monthly payment thereafter from your monthly income. This makes the proposal much more attractive to the creditors because of the lump sum payment. The downside is that you, the debtor, pay interest on the money borrowed for the front payment, but this is offset by the lower payments you make during the proposal.
Your Job: Your employer cannot fire, suspend or lay you off because you filed a consumer proposal.
Rights of Creditors: Creditor’s rights (who have no security) to start or continue any lawsuit or collection procedures are suspended immediately upon the filing of the proposal. Creditors who have security are allowed to deal with the security outside of the proposal.
Landlords: A landlord cannot evict you simply because you filed a consumer proposal.
Utilities: Services for water, hydro fuel, and telephone cannot be disconnected simply because you owe those providers money when you filed the consumer proposal, however the utility companies have no obligation to provide future services. There are two practical solutions. The first is to offer the utility company a security deposit for future services. The utility company will be obligated to pay you interest on the security deposit (which is good) but the amount of the security deposit is usually equal to or higher than the debt owing in the consumer proposal (which is bad). Also there is the added problem of where the cash comes from for the security deposit. The second, and more common solution, especially for small ongoing services, is to leave the utility debt out of the consumer proposal and pay them on an ongoing basis.
If you are moving at the time of the filing of the consumer proposal, you might have the best of both worlds by putting the old utilities in the consumer proposal and signing new agreements with new utilities at your new home.
Personal possesions: The Bankruptcy and Insolvency Act is Federal legislation but a specific provision allows Provinces to exempt certain assets from seizure by creditors. All provinces have allowed certain assets up to a specified dollar amount to be exempt. These assets normally include clothes, furniture, motor vehicles, tools of trade, etc. Note that if you have given anything as specific security to a creditor you may have waived your rights to the Provincial exemption.
How does a consumer proposal get filed?
As in most legal proceedings, there are several forms that must be completed. A consumer Proposal in Canada can only be filed through a Trustee in Bankruptcy who is licensed by the Office of the Superintendent of Bankruptcy. Even if you have had the assistance of another financial advisor, the Trustee in Bankruptcy assumes the responsibility for the consumer proposal. This involves making sure that all documents are properly completed, that the terms are fair to both you and your creditors, filing the documents in court, notifying the creditors and tabulating the votes on the consumer proposal. You should be aware that there is no obligation by the creditors to accept your consumer proposal – they can vote yes or no – or – they can propose a counter offer, which you can in turn accept or refuse. There is often much negotiation between you and the creditors before the consumer proposal is approved. Once the proposal is approved your only obligation is to pay the amount stipulated in the consumer proposal. The creditors, who stopped all collection actions when the consumer proposal was first filed in court, simply wait for the distributions to be made to them by the Trustee in Bankruptcy who acts as the administrator of the consumer proposal.
What happens after I sign the consumer proposal papers?
Shortly after you sign the papers the Administrator of the Consumer Proposal will send a report to the Official Receiver at the Office of the Superintendent of Bankruptcy in Ottawa. The report contains information about your consumer proposal (list of assets, liabilities, names of creditors, etc.) and concludes with the opinion of the Administrator as to whether or not your consumer proposal is fair and reasonable and whether or not the Administrator believes you will be able to complete the consumer proposal.
At the same time the Administrator sends a report to each of your creditors. The creditors are asked to complete a Proof of Claim form and return it to the Administrator with their vote to accept or reject the consumer proposal. If the creditors do not respond to the administrator within 45 days after the consumer proposal is filed, they are deemed to have accepted the consumer proposal.
Once the creditors have accepted the proposal, the Administrator will proceed to obtain the approval of the court for the consumer proposal. In most cases the court approves of the consumer proposal 15 days after the creditor approval. After court approval, your only responsibility is to follow the terms of the consumer proposal and attend two (2) manditory counselling sessions. The purpose of the counselling sessions is to assist you in rebuilding your credit and help you to understand how you got into financial trouble in the past. If you fail to attend either counselling session he/she is not entitled to a Certificate of Full Performance (Discharge).
What if I miss payments?
Once your consumer proposal has started, if you miss three (3) payments the consumer proposal is annulled and all legal rights of the creditors are restored. The amount that you owe each creditor is the original amount that you started with less any monies that the creditors received during the consumer proposal before you missed the three (3) monthly payments.
If you find that your financial situation has changes, contact your trustee immediately. It may be possible to amend your consumer proposal by reducing your monthly payments to fit your new circumstances.
I’ve finished my consumer proposal: Now what?
When you have completed all of the terms of the consumer proposal, the Administrator will give to you a Certificate of Full Performance. A copy is also sent to the Official Receiver. You are now relieved of all debts that were included in the consumer proposal.
You should send a copy of this Certificate to the credit bureaus (Equifax and TransUnion of Canada) so that they can update their records. Instructions will be given to you at that time by the Administrator.
All time(Schedules) sequences start from the date of the signing of the documents by the individual who is filing the assignment in bankruptcy. This normally takes place a few days after the initial meeting with the Trustee. Prior to signing the papers to file the assignment in bankruptcy, each person must have an assessment meeting with the Trustee. The assessment meeting will take place at the time of the initial meeting or at the time the documents are signed for the bankruptcy.
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For income tax preparation you must provide the Trustee with income information, i.e., the most current pay stub or an income statement if self-employed, U.I. information, welfare, and support paid/received by court order or agreement. Note: you should supply the Trustee with a copy of the court order or signed agreement for alimony or child support.
The bankruptcy documents will be submitted to the Official Receiver’s Office (Industry Canada, Bankruptcy Division). Within five days after the bankrupt has signed his/her papers, a notice will be mailed to all of the creditors advising them of the Bankruptcy. The purpose of this notification is as follows:
1. To have creditors file a Proof of Claim with the Trustee.
2. To advise creditors of the bankruptcy generally.
3. To advise creditors of their rights to request a meeting with the Trustee and the person who is bankrupt.
4. To advise creditors of the projected date of the discharge of the bankrupt.
Immediately after you sign your papers you should notify any of your creditors who have post-dated cheques that they should return these cheques to you and not cash them. Also, if any creditor has a pre-authorized payment, this authorization must be cancelled by you, including those that may be made on your credit cards (which should be turned over to the Trustee upon signing your papers).
The first counseling meeting takes place approximately 30 days after the signing of the original papers for the Bankruptcy. The location of the first counselling meeting for personal bankruptcies is normally the Trustee’s office. If you fail to attend the counseling session, you will not be entitled to an automatic discharge and will be required to attend a court hearing to deal with your discharge.
Depending on the causes of the Bankruptcy or the individual problems that are present, the counseling session will take place in the Trustee’s office or be delegated to an outside agency (e.g. credit counseling, Alcoholics Anonymous, Gamblers Anonymous, etc.). If a Bankrupt person fails to attend a counseling session, he/she is not entitled to receive an automatic discharge from bankruptcy.
If creditors request a first meeting, you will be required to attend a meeting and you will be notified of the date and time.
If problems are extreme a meeting with the Official Receiver may take place. The need for such meetings will be discussed with individuals as needed.
A period of time is now allowed to enable the initial administration of the bankruptcy to be completed. This can involve the preparation of Income Tax Returns, the return of property, which belongs to a secured creditor, as well as any other matters to which the Trustee is required to attend as part of his duties. If you have forgotten to declare assets that you own, or debts that you have, please contact our office immediately.
On a monthly basis throughout the 9-month term of the Bankruptcy, you will be asked to complete a Monthly Statement of Income and Expenses. The purpose of this monthly statement is to allow the Trustee to monitor your financial situation during the Bankruptcy. If you have surplus income on a regular basis, you will be expected to contribute a portion of the surplus to your creditors while you are in bankruptcy. At least three months before the discharge hearing date you will be asked to come to the Trustee’s office to complete certain forms needed by the Trustee to prepare his report for your application for discharge from your bankruptcy. At this time you will also have the second counseling session, which is required by the Bankruptcy and Insolvency Act. You will receive a letter of instructions from the Trustee with respect to this meeting and the completion of your bankruptcy. If you fail to attend this meeting, you are not entitled to receive an automatic discharge from your Bankruptcy – a hearing must be scheduled in court for your discharge from bankruptcy. It is not uncommon for your discharge from bankruptcy to be delayed up to ten (10) months while waiting for a court date. Note: you will not receive your discharge if the Trustee’s fees are not paid.
During the 8 week period prior to the discharge hearing, a report is prepared by the Trustee and submitted to the Official Receiver and the court with respect to all maters known to the Trustee up to that time. A recommendation will be made based on the conduct and co-operation by the bankrupt, which can affect the discharge of the bankrupt. The result of this report is that the discharge procedure (if the Trustee is able to report favorably on the conduct of the bankrupt) is in process.
The automatic discharge hearing date for people filing bankruptcy for the first time is 9 months after the bankruptcy has been filed. The bankrupt will not normally be required to attend the discharge hearing unless a creditor has objected to their discharge or some other matter has come to light, which would indicate that the bankrupt person should not be given an absolute discharge. Other matters are listed in the booklet, which is given to every person at the start of the bankruptcy. If the bankrupt is receiving an absolute discharge, the papers take approximately 30 days after the discharge hearing to be prepared and forwarded to the bankrupt. If this is a second bankruptcy, the discharge will take place 24 months after the bankruptcy has been filed.
It is quite common after the bankrupt has been discharged for the Trustee still to be completing certain of their duties. The most common is the completion of the Income Tax Return for the calendar year during which the bankruptcy occurred. Once the entire administration of the bankruptcy is completed, the Trustee must be discharged. A notice is sent to the bankrupt as to when this is occurring. It is not uncommon for the discharge of the Trustee to take place as long as 11⁄2 years after the debtor has been discharged.
Please note that any income tax refunds up to the end of the year in which you file your bankruptcy and GST Credits until the Trustee’s discharge will be sent to the Trustee for distribution to your creditors. GST refunds cannot be paid to your creditors and will be refunded to the bankrupt person unless the funds are required for Trustee’s fees and disbursements.
Please make sure that the Trustee is aware of where you are living and working and your current telephone numbers at all times up to the date of both the bankrupt’s discharge and the Trustee’s discharge. This will allow for your file to be completed in the shortest possible time.
When you make a payment to the Trustee, please make your cheque, money order, etc., payable to “Rumanek & Company LTD., In Trust.” Please make sure that your full legal name (or that of the bankrupt if you are paying for someone else) is on the cheque or cash receipt when payments are made.
If you have any difficulties at any time throughout the bankruptcy, please contact the Trustee’s in office.