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What Happens If Creditors Vote No & Reject My Consumer Proposal?

If you are considering filing a consumer proposal, you may have heard that your creditors will vote on whether to accept the proposal. This can be an intimidating prospect, and it is natural to wonder: how often do creditors vote no? If they vote no, can you make a modified proposal? Will your creditors be willing to consider your proposal a second time? What is the actual process?

What percentage of consumer proposals are accepted?

Let’s start with the good news: the vast majority of consumer proposals are accepted by the creditors, usually within the initial 45-day voting period. This is because a Licensed Insolvency Trustee (LIT) works with you to create and file a proposal that will be deemed reasonable by your creditors. An LIT is an expert at insolvency solutions and is informed regarding what creditors look for in a consumer proposal.

LITs know that creditors prefer consumer proposals to bankruptcies because the creditors receive more of what they are owed if the consumer files a consumer proposal rather than a bankruptcy. Many consumers prefer consumer proposal to bankruptcy as well, because of its features.

When you work with an LIT to arrive at the payment plan in the proposal, he or she will analyse your income, expenses and assets to determine the monthly payment you can reasonably afford. The creditors will receive some of this information when you file. 

Why would a creditor reject a consumer proposal?

As long as you are not insisting on retaining luxuries (think: riding lessons, expensive vacations or other pricey lifestyle choices during the term of your proposal), creditors typically accept consumer proposals. 

Conversely, if a creditor can see that you could easily afford to pay more into your proposal if you cut out some unnecessary expenses, that creditor might reject it.

How Do Creditors Indicate Acceptance or Rejection of a Consumer Proposal?

You may imagine a meeting of creditors around a table (or on Zoom) as they discuss the details of your consumer proposal and ask you questions. This is an uncomfortable image, but take heart – it rarely happens!

Each creditor has a “vote” for each dollar of their claim (what they are owed). Creditors have 45 days from the filing of the consumer proposal to accept or reject it. They can respond in one of these four ways:

  1. Communicate to your LIT that they accept the proposal
  2. Not respond at all – in which case, they are deemed to have accepted the proposal
  3. Communicate to your LIT that they reject the proposal 
  4. Communicate to your LIT that they reject the proposal and request a creditors’ meeting

What happens if any creditors reject my proposal?

Importantly, if a creditor indicates that they reject the proposal but does not request a creditors’ meeting, their rejection has no effect.

If creditors whose combined votes are less than 25% of total votes indicate that they reject the proposal and request a creditors’ meeting, your proposal is still accepted.

Only if creditors with more than 25% of the total votes reject the proposal and request a creditors’ meeting, is a creditors’ meeting called. It must be held within 21 days of being called.

The creditors’ meeting and the vote

Before the meeting date, your Trustee will communicate with the creditors and with you. He or she will learn what conditions the creditors require to vote yes, and what conditions you are able and willing to meet. If agreement is reached, it is a simple matter for the creditors to confirm their approval of the modified proposal (“vote”) by informing your Trustee by phone or email. At this point, 50% of votes must be “yes” for the proposal to be approved. 

Remember that each creditor has a vote for each dollar of their claim. 

If the proposal cannot be approved at this point, typically it is withdrawn.

Thus, it is very rare for an actual “meeting of creditors” to take place.

If Your Consumer Proposal Is Rejected, What Other Options Do You Have?

In the unusual case that your consumer proposal is ultimately rejected, you still have choices. Note that the most common reasons for creditors to reject a proposal are that they wish to have a larger monthly payment, and/or a longer payment term (the maximum term is five years).

Here are some options:

  1. You can withdraw your proposal and revisit other options such as debt consolidation or an enhanced job search, in case such options can relieve your insolvency.
  2. You can withdraw your proposal, take some time to assess your situation, and apply for a consumer proposal again (see below).
  3. If your consumer proposal indeed represented the most you could pay, and other options are not suitable, you can decide to withdraw your proposal and file for bankruptcy.

Can You File A Second Consumer Proposal?

If your first consumer proposal filing is not successful (is rejected by the creditors, and withdrawn), and if you do not decide to file for bankruptcy, you may file a new consumer proposal at any time. The best reason to do this is a change in your circumstances, such as a new job that will allow you to propose a more robust payment plan.

Most LITs recommend waiting for six months from the initial filing, before filing for a consumer proposal again. If you make a new consumer proposal filing within six months of your first filing, the second filing will not invoke the same protections from creditors (i.e., the “stay of proceedings” which stops collection activities).

It is interesting to note that if your consumer proposal filing is successful, and you complete the terms of your proposal and receive your Certificate of Completion, under Canadian law you can file a new consumer proposal at any time in the future should you become insolvent again. Unlike bankruptcy, in which second and third bankruptcies are subject to increasingly stringent conditions, each consumer proposal will be subject to the same rules as the first (under current regulations).

Next Step: Talk With a Licensed Insolvency Trustee

In Canada, you must work with a Licensed Insolvency Trustee (LIT) to file a consumer proposal or file for bankruptcy. LITs are federally licensed professionals who are fully qualified and trained to work for the best outcomes for both debtors and creditors. They are experts in bankruptcy, consumer proposals, and many alternatives.

Your first meeting with an LIT is confidential, free of charge and without obligation. Be prepared to let the Trustee know your income, expenses, assets and debts (estimates are fine at your first meeting) and start a conversation. Most debtors come away from their first meeting with an LIT feeling a weight has been lifted. Learning about your options is empowering, and is your first step on the road to a better financial future. 

Find a Trustee near you today!

Notes: Six-month rule regarding submitting a new consumer proposal, source: Bankruptcy and Insolvency Act, 69.2 (2). ]