When you are facing financial hardship, there are options to help you tackle your debt and work toward financial freedom.
A Licensed Insolvency Trustee (LIT) can offer various solutions, including division I and division II Proposals. A consumer proposal and a division II proposal are the exact same thing and these terms can be used interchangeably. A division II proposal is called a consumer proposal because only consumers or individuals can file a division II proposal. A division I proposal is available to both individuals as well as businesses.
Typically a consumer (or individual) will file a division II proposal whenever possible because of the additional flexibility this proposal offers however there are some situations where that isn’t possible and it becomes important to know how your obligations could change if you file a division I proposal.
Our team at Frederick & Company Ltd. is here to help you navigate troubling financial situations. Booking a free consultation with us means we can have an open dialogue to walk you through the benefits and drawbacks of each option available to you.
Keep reading to learn more about division I and II proposals and how our experienced team can help you make the best decision for your financial health:
Division I Proposals in Alberta
A division I proposal is a formal and legally binding agreement between creditors and the individual or corporation which can be filed by an insolvent person. An insolvent person is someone who owes money to his/her/their creditors and is unable to pay those debts as they become due.
When someone files a division I proposal, all interest on their debts stops immediately, and the debtor is protected against creditors from wage garnishment, collection efforts, and legal action relating to their unsecured debts.
A division I proposal allows you to avoid bankruptcy and maintain control over your assets. The Trustee will work with you to review your income, the number of people in the household, and non-exempt assets and calculate a payment that will offer a better advantage to your creditors when compared to bankruptcy.
The term of a division I proposal is unlimited by the legislation but likely would be limited by the creditor’s willingness to wait. Consumer proposals are limited to five years and we typically would set up division I proposals to be the same term unless there were special circumstances that made setting a longer term more advantageous to creditors.
How Does a Division I Proposal Work?
Once you’ve met with your Trustee and have decided that a division I proposal is best for you, the Trustee will work with you to compile information relating to your income, assets, and liabilities. Using this information, the Trustee will work with you to determine what you can offer your creditors that would provide a better advantage to creditors than bankruptcy.
Creditors will be able to vote for or against your proposal however if they vote against the proposal the Trustee will begin a conversation with the creditor to negotiate the terms of the proposal that would be agreeable and in most cases, Frederick & Company Ltd is successful at negotiating terms that would be agreeable to all parties.
For the division I proposal to be accepted, both the majority in number of creditors and a two-thirds majority in value must vote for the acceptance of the proposal.
For example, if you have 3 voting creditors ($33,000 to Creditor 1, $40,000 to Creditor 2, and $20,000 to Creditor 3) you will need at least 2 creditors to vote for and the amounts of their claims must make up two-thirds ($62,000) or more of the total claims of voting creditors.
So if Creditors 1 and 2 vote for the proposal then it would be accepted but if Creditors 2 and 3 vote for the proposal then they would need Creditor 1 as well in order to meet the minimum voting requirements as the two-thirds threshold would not be met with just Creditor 2 and 3.
Once the division I proposal is accepted by the creditors then the Trustee will make an application to have this Proposal accepted by the Court. After the Court has reviewed and accepted the Proposal the terms of the Proposal are binding on all creditors, even those that didn’t vote to approve the proposal.
Should the proposal be rejected by the creditors or the court, the insolvent person is automatically assigned to bankruptcy. This is why we advocate meeting with your Trustee to discuss all the options available to you prior to committing to any one option.
If both the courts and the creditors accept your proposal, you will need to make your payments as agreed and attend two financial counselling sessions to help you on your journey to financial success.
Be cautious, however, that if you miss even one payment on a division I proposal, the proposal will fail, which is why we advocate contributing additional money towards the estate whenever possible to prevent you from defaulting. A defaulted proposal means that the stay of proceedings – the protection against your creditors – is lifted, and they will have full rights to go after you once again for the debts.
Division I Proposals and Credit Ratings
It’s important to note that accepted division I proposals are reported to the credit bureau, and your credit rating should be recorded as R7. There were previous issues with credit bureaus registering consumer proposals as bankruptcies – and therefore an R9 – however, we understand that is in the process of being corrected.
An R7 will appear in the rate for each individual creditor that was included in the proposal and this means that a settlement has been made on the debt.
A division I proposal will stay on your credit report for a total of six (6) years or three (3) years after the full completion of the proposal whichever is earlier.
Consumer Proposals in Alberta
Consumer proposals – or Division II proposals – are a more flexible proposal process and are generally preferred if you are eligible to file this kind of proposal.
Like a division I proposal, a consumer proposal is a formal and legally binding agreement document between creditors and the individual in debt.
Both kinds of proposals allow you to avoid bankruptcy and maintain control over your assets. The Trustee works with you to review your income and non-exempt assets and calculate a payment that will offer a better advantage to your creditors when compared to bankruptcy. A consumer proposal is an alternative step to filing bankruptcy.
A consumer proposal cannot have a repayment term of longer than five years.
Who Qualifies for a Consumer Proposal?
A consumer proposal can be filed by a natural person (not a corporation) who cannot pay their debts as they become due and who owes less than $250,000 to creditors excluding the security on your principal residence ie. the house you currently reside in. Let’s look at some examples to better understand this:
If you owe $100,000 in credit cards, $100,000 secured to your pick-up truck, and $60,000 in taxes you are not eligible to file a division II proposal as your total consumer debts exceed $250,000. You would be able to file a division I proposal.
If you owe $50,000 on your credit cards and $300,000 on a rental property you would not be eligible to file a division II proposal because your total consumer debts exceed $250,000 because you do not reside in the rental proposal. You would be able to file a division I proposal.
You owe $120,000 in taxes to Canada Revenue Agency and owe $750,000 on the mortgage of the house you reside in. You would be eligible to file a division II proposal because you reside in the property so the $750,000 is excluded from the calculation when determining if the total debts exceed the threshold. You would also be eligible to file a division I proposal should you choose that option.
The debtor must also have a stable source of income while unable to pay the outstanding balances on unsecured debts.
How Does A Consumer Proposal Work?
When someone files a consumer proposal, all interest on their debts stops immediately, and the debtor is protected against creditors from wage garnishment, collection efforts, and legal action relating to their unsecured debts.
Like a division I proposal, this is a settlement offer to your creditors so you would only be paying a portion of what is owed if the proposal is accepted.
In a consumer proposal, the payment amount depends primarily on the individual’s household income, non-exempt assets, and the number of people in their household.
How Does a Consumer Proposal Affect Credit?
A consumer proposal will affect the individual’s credit rating and each creditor impacted by the proposal will have an R7 rating which means that you have made a settlement with your creditors and did not pay the debt in full.
How to File a Consumer Proposal
A division II proposal is also filed by a Licensed Insolvency Trustee who prepares and files the proposal. Once you’ve met with your Trustee and have decided that a division II proposal is best for you, the Trustee will work with you to compile information relating to your income, assets, and liabilities. Using this information, the Trustee will put together an offer to your creditors that will pay a portion of your total unsecured debts over time.
For the division II proposal to be accepted, a majority in dollar value from all your creditors must vote in favour, and each dollar owed is a vote
Once your proposal has been filed and sent to your creditors, they have 45 days to cast their votes to either accept, reject or abstain, and the majority in dollar value must approve it in order for it to be accepted.
If the proposal is rejected typically that creditor will negotiate with the Trustee to find terms that are agreeable for both the creditor and yourself. If there is a compromise that is agreeable to all parties then the proposal is adjusted to the new terms. If no agreement can be reached it is important to know that it does not result in the automatic filing of bankruptcy. Your Trustee will walk you through your other options again to find the best path for you should this less probable situation occur.
Division I Proposals Versus Consumer Proposals: The Main Differences
Now that you understand what a division I and division II proposal are, let’s look at the main differences between the two:
Who Can File?
Division I proposals can be filed on behalf of an individual, partnership, or corporation. Consumer proposals can only be filed by an individual with $250,000 or less owing in credit cards, unsecured loans, unsecured lines of credit, and any secured loans excluding the secured debt outstanding on the principal residence. Anyone who can file a consumer proposal can also file a Division I Proposal however not everyone who files a Division I Proposal is eligible to file a consumer proposal based on the limitation noted above.
If the division I proposal is rejected, the debtor is automatically assigned into bankruptcy. However, there are no deemed bankruptcy rules in a consumer proposal, so the rejected applicant can pursue other financial options, including waiting a period and filing the proposal again in the future.
Both types of proposals are based on your ability to pay, specifically your household income, non-exempt assets, and the number of people in your household. The total you will contribute to the proposal must be higher than bankruptcy would offer, and your Trustee will help you calculate this.
The payments will be spread over 5 years, typically, but this time can vary from proposal to proposal. The cost between a division I proposal and a division II proposal is slightly different but not a significant factor when making a decision about which is right for you. T
here are other factors such as flexibility and proposal timeline that would contribute more to picking one proposal type over the other.
Term of Proposal
Consumer proposals are limited to a term of 5 years which means all contributions to the proposal need to be completed within that timeframe.
Division I proposals do not have a legislated timeline. Therefore, they may last longer than the 5-year limit of a consumer proposal. However, you would need to balance the benefit to creditors with the additional time they would need to receive that benefit prior to considering a lengthy proposal term.
It is also worth considering is the extended period would delay the fresh start for the individual filing the proposal as well.
A division I proposal is far more rigid in its repayment terms – should one payment be missed you will need to make it back up within 30 days otherwise the proposal will be annulled or it will cease.
With a division II proposal, there is more flexibility and you can miss up to three payments but once you have missed three monthly payments your proposal will be deemed annulled.
Types of Debt
It’s important to distinguish between two types of debts: unsecured debts and secured debts.
Unsecured debts are typically liabilities such as credit cards, student loans, income tax debt that does not form part of a writ, payday loans, lines of credit, and personal loans that do not have an asset designated as security should a default on repayment occur. It is these unsecured debts that are included in all proposals.
Secured debts are debts that have an asset “secured” to them. For example, a mortgage tied to a house, or an auto loan tied to a vehicle. These loans provide the bank security in knowing that if the loan is not repaid there is an asset they can realize to offset the outstanding liability.
The individual filing will discuss with the trustee the option of keeping the secured assets – and thus the secured liabilities as well – and the option to let the secured asset go back to the creditor and thereby include this debt – and any potential unsecured liability owing – in the proposal. It is advisable to consider this for assets where a substantial amount of debt is owed on the loan above the value of the asset.
In both proposals, the individual filing the proposal will retain control over their assets and can do with them as they wish. Of course, any secured assets – like a house with a mortgage – are subject first and foremost to the security granted to the lender thus in order to keep these assets you need to keep up to date on the payments.
We Are Here For You!
Our compassionate team at Frederick & Company is here to help you wade through these financial decisions to help you understand the differences and help you make an informed decision about which option might fit you the best.
With our years of experience and dedication to our clients, we can help you make the best financial decisions based on your unique situation.
Contact us today for more information and to explore your options!