What Is a Division I Proposal?
August 17th, 2022 by A Licensed Insolvency Trustee
As you explore the world of insolvency solutions, you may have encountered information about both bankruptcy and consumer proposal. But, did you know that there is another type of proposal available to Canadian debtors? The Division I Proposal can handle certain situations that the “regular” consumer proposal cannot address.
Insolvency Solutions for Consumers: Bankruptcies and Proposals to Creditors
Before we explore the two types of proposals to creditors available to Canadian consumers, we will touch on bankruptcy because that’s the financial strategy you’ll often think of first if you are under financial stress.
The Role of Bankruptcy as an Insolvency Solution for Consumers
A bad financial situation usually does not occur overnight, but grows over months or years (although there are exceptions in the cases of emergencies and illness-related expenses).
After scrambling to pay your bills for several months – and perhaps even missing some payments – you begin to wonder: will I need to declare bankruptcy?
Bankruptcy can be stressful
Bankruptcy is a process through which a consumer can make a new financial beginning, but it can also be an uncomfortable prospect. Although you will not lose everything you own, most consumers who file for bankruptcy must give up some of their assets to the Licensed Insolvency Trustee, to pay back a portion of the value their creditors have advanced. This process can be stressful.
The good news is that if you have never been bankrupt before, bankruptcy usually only lasts 9 to 21 months – so the period during which you are in bankruptcy is over quite quickly. Once you are released from bankruptcy, the debts it covered are extinguished forever.
What Is a “Division I Proposal?”
If you’ve been reading about insolvency solutions such as bankruptcy and consumer proposal, you may have been unaware that Canada’s Bankruptcy and Insolvency Act defines two types of proposals to creditors: the Division I Proposal, which can be used by individuals or businesses to cover any amount of debt, and the Division II Proposal, which is also known as the consumer proposal, and has a limit for $250,000 of unsecured debt.
A Division I Proposal is usually used by businesses
Businesses tend to have larger debt amounts than individual consumers – and may have more complicated structures, such as business partnerships. Division I Proposals are designed for these situations, and are somewhat more complicated to set up and administer. There is no limit to the amount of unsecured debt a Division I Proposal can cover.
Can a consumer make a Division I Proposal?
In certain situations, an individual consumer may be advised to make a Division I Proposal. Usually, this is because the consumer’s unsecured debts amount to more than the $250,000 limit for consumer proposals.
A Consumer Proposal is a “Division II Proposal”
Most consumers who file a proposal to their creditors file a Division II Proposal – hence its nickname, the “consumer proposal.” The Division II Proposal is, in fact, not intended for businesses. It is available to consumers with up to $250,000 in unsecured debt. Debts covered may include small business debts incurred by individual consumers. You will find more details on consumer proposals later in this article.
Qualifying for a Division I Proposal
A Division I Proposal is suitable for individual consumers facing insolvency, who owe more than $250,000 excluding secured debts such as home mortgages and car loans. And similar to bankruptcy, such a proposal can also be used by businesses with any amount of debt.
In this article, we will focus on consumers. If you owe more than $250,000 in unsecured debt and cannot pay your bills, but have a steady income, a Division I Proposal may work well for you.
What is involved when I make a Division I Proposal?
The first part of resolving your debt problem is realizing that you need professional advice. It can be hard to admit that you can no longer fix the situation just by spending less or hoping for a windfall – but don’t be embarrassed. Financial difficulties usually result from dealing with everyday life – and financial professionals understand that.
Next, make an appointment with a Licensed Insolvency Trustee (LIT). Only an LIT is qualified to prepare and file bankruptcies and Division I and II Proposals with Canada’s Office of the Superintendent of Bankruptcy.
At your meeting with the Trustee, you will review your financial situation, which includes your debts and your monthly expenses, as well as your assets and your monthly income. This information will help the Trustee determine which options will work best for you and your creditors.
If your financial troubles are serious, with little flexibility, the Trustee may advise bankruptcy. For consumer debtors with regular monthly income, consumer proposal may be the Trustee’s recommendation. And, if you have income and your debts total more than $250,000, a Division I Proposal may be the best solution.
Steps in the Division I Proposal process
Once you have gone over your financial situation with the Trustee, discussed your options, and decided upon making a Division I Proposal, the Trustee can begin preparing the paperwork. Here is what happens next:
- You and the Trustee will review the paperwork. In the body of the Proposal, the Trustee will outline your financial situation, your monthly expenses, and your earnings. These totals are included because they demonstrate to the creditors what you can afford to pay them. The amount of the proposed total payment will be more than what the creditors would receive if you had chosen to declare bankruptcy.
- The Trustee will file the proposal with Canada’s Office of the Superintendent of Bankruptcy, and send information packages to the creditors.
- You will benefit from legal protections as soon as the proposal is filed. Your creditors will no longer legally be allowed to contact you or to file or continue lawsuits against you concerning your debts. Also, interest will stop accruing on your debts.
- The creditors will vote on the proposal. Most proposals are accepted, as the creditors will receive more than they would have in the event you declared bankruptcy – but occasionally, if they believe you can pay more, they will press for changes to the proposal. In the case of Division I Proposals, over 50% of the creditors who are owed at least two-thirds of the debt must vote in favour. Note that if an agreement cannot be reached (i.e., the proposal fails), or if you fail in your duties according to the proposal, you will automatically be put into bankruptcy.
- The court will approve the proposal. In the case of Division I Proposals, court approval is required to put the proposal into full effect. Typically, this happens without incident.
What are the benefits of a Division I Proposal?
As mentioned earlier, once your Division I Proposal has been filed by the Licensed Insolvency Trustee, your creditors may no longer proceed with collection activities. From the time your proposal is filed, your Trustee is the creditors’ contact regarding your accounts.
You will find budgetting much easier once you are paying a single monthly amount towards your proposal, rather than paying numerous creditors. Typically, your single payment is lower than the total of your previous payment obligations.
You can pay off the proposal early if your financial circumstances change for the better. This is a key difference between proposals to creditors and bankruptcy.
A Proposal is an alternative to bankruptcy. Many consumer debtors favour paying their creditors as much as possible, which is exactly what happens with a Division I or II Proposal to creditors. Also, the debtor will never have to answer “yes,” if asked if they have ever been bankrupt.
Disadvantages of a Division I Proposal
If the creditors do not accept the proposal, or if you fail in your duties under the proposal, you will automatically become bankrupt.
A proposal customarily lasts longer than a bankruptcy. A first-time bankruptcy typically lasts 21 months if you have significant income, whereas most proposals to creditors are designed to be paid off over five years of monthly payments.
It’s more expensive than a bankruptcy. The typical five years of monthly payments undertaken in a proposal to creditors amounts to more money than the payments that would go into a bankruptcy.
Consumer Proposal (Division II Proposal) as a Debt Solution
The consumer proposal, or “Division II Proposal,” is streamlined, compared to the Division I Proposal. This is both because it is geared to deal with a smaller amount of debt, and because it is intended specifically for consumers.
Differences between a consumer proposal and a Division I proposal
- In a consumer proposal, there is no meeting of creditors unless one is requested by creditors with claims totalling more than 25% of your debt. Conversely, in a Division I Proposal there is always a meeting of creditors (although this may not be a physical meeting – it may be conducted via correspondence with the Trustee).
- In a consumer proposal, if your proposal is not accepted, you are free to make new choices to deal with your debt. Conversely, in a Division I Proposal, if the proposal is rejected you are automatically placed into bankruptcy.
- A consumer proposal can be annulled if you miss three months-worth of payments. A Division I proposal is stricter – it can be annulled due to any missed payment.
The process of making a consumer proposal
The steps for making a consumer proposal are very similar to the steps for a Division I Proposal, as described earlier in this article. However, there are two key differences:
- In a consumer proposal, the proposal is deemed accepted unless there is a creditors’ meeting (which only happens if creditors representing 25% or more of your debt request a meeting), and at that meeting creditors representing 50% or more of the value of the debts covered by your proposal vote to reject it. Although it sounds complicated, this is simpler and less stringent than the voting process for Division I Proposals.
- In a consumer proposal, once the proposal is accepted by the creditors or deemed accepted (as some creditors may not bother to respond to the Trustee’s letter), the proposal goes ahead without the need for court approval. In a Division I Proposal, the court must approve the proposal before it can proceed.
Dealing with Your Debts Promptly Has Distinct Advantages
This article deals with bankruptcy, Division I Proposals, and consumer proposals (Division II Proposals). You may have gathered that bankruptcy is suited to the most difficult insolvency situations, and consumer proposal to situations with more flexibility. For those who qualify and can carry out the requirements of a consumer proposal, it is often the least stressful and easiest of the three options.
This is why it is important to take action on your debt situation before your debt either grows greater than $250,000 (the limit for a consumer proposal), or your situation deteriorates and you don’t have enough income to make monthly payments – in which case, bankruptcy may be your only option.
However, the good news is that whether you make a proposal or you file for bankruptcy, you receive protection from your creditors and you can look forward to a new financial start.
Insolvency is common
It is important to realize that having debt problems does not make you stand out in a crowd. In fact, over 90,000 Canadian consumers file a bankruptcy or a Division I or II Proposal every year. Like you, these consumers have fallen prey to spiralling debt, despite doing their best to handle credit responsibly.
Begin Resolving Your Debt Today!
Want to learn more about options for your specific situation? Make a free first appointment with a Licensed Insolvency Trustee. Trustees understand consumer debt and its causes, so there is no need to feel embarrassed. Your discussion with the Trustee is confidential and there is no obligation. You’ll feel much better when you can see the road ahead – reach out to a Licensed Insolvency Trustee in your community today!
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