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Filing a consumer proposal in Canada involves a series of steps, starting with seeking assistance from a Licensed Insolvency Trustee (LIT) submitting the proposal to creditors, allowing the creditors time to vote, and then settling on a payment arrangement. Here's a comprehensive outline for individuals considering filing a consumer proposal.
- Seek Assistance of LIT: Debtors begin by seeking the expertise of a Licensed Insolvency Trustee (LIT) to evaluate their financial situation and explore options for debt relief. In Canada only LIT are licensed to help debtors file a consumer proposal.
- Free Initial Meeting with LIT: The debtor meets with the LIT for a free initial consultation, during which the LIT gathers information about the debtor's financial situation, including valuing assets, debts, income, and expenses. The debtor has the choice to decide to file a bankruptcy or a consumer proposal.
- Completion of Application Form: The debtor fills out an application form provided by the LIT, detailing all financial information, including a comprehensive list of personal assets, debts, and an "average family monthly statement of Income and expenses.". This information forms the basis of the offer to creditors.
- The Offer to Creditors: The offer to creditors under a consumer proposal offer a better return to the creditors than they could expect to receive if the individual were to declare bankruptcy. As such, the LIT will assist the debtor with a review of their expected income for the proposal period as well as reviewing the value of assets owned. The value of personal assets and the amount a debtor is expected to earn will determine what is a reasonable offer to creditors. Part of the proposal prepared by the LIT will illustrate the difference in returns for creditors between a personal bankruptcy and consumer proposal.
- Preparation of Formal Proposal Documents: Using the information provided by the debtor, the LIT's office and staff prepare formal proposal documents outlining the proposed settlement to be presented to creditors for consideration. The LIT will highlight that, in their opinion, the proposal offers a better return for creditors and will make a written recommendation to creditors.
- Signing of Formal Proposal Documents: Once prepared, the debtor signs the formal proposal documents, which are generated by the LIT based on the information provided during the application process. These documents can be signed by the debtor in person or virtually.
- Submission to OSB and Creditors: The LIT submits the formal proposal documents to both the Office of the Superintendent of Bankruptcy (OSB) and the creditors for review and consideration.
- Immediate Effect of Stay of Proceedings: Upon filing the consumer proposal, a Stay of Proceedings is automatically initiated, providing immediate relief to the debtor by halting creditor actions such as wage garnishments, lawsuits, and collection calls. This Stay also benefits creditors by ensuring a fair and orderly process for debt resolution.
- Prohibition on Incurring More Debt and Making Payments: Throughout the proposal process, debtors are prohibited from incurring additional debt or making payments to creditors. To facilitate this, the LIT may recommend opening a new bank account free from any existing debts or liabilities. This means that the debtor focusses on spending only what they bring in, and prevents creditors from taken funds out of the debtors accounts that they are not entitled to receive under the Stay.
- Filing of Outstanding Personal Tax Returns: Debtors are required to file all outstanding personal tax returns if they want to file a consumer proposal. If there's anticipated personal tax debt, the LIT additionally assists the debtor by preparing a "stub" personal tax return for the period from January 1 (in the year the proposal was filed) to the date of filing, to calculate any personal tax debt for the preceding stub tax year.
- Proposal Structuring and Approval: Proposals can be structured in a manner that benefits the debtor, with lower initial payments, and always include the option to pay off the proposal more quickly. Typically structured over a maximum of 60 months, proposals are subject to a 45-day waiting period during which creditors vote on the proposal. Approval requires a simple majority (50% of creditors who vote). Even if a creditor votes "no," the accepted proposal is binding on all creditors once accepted.
- Creditor Meeting: If creditors holding 25% of the vote within the first 45 days request a meeting, the LIT calls a meeting within 21 days after the expiration of the 45-day period to further discuss the proposal. The vast majority of time, the debtor and the creditors reach a settlement amount. If no settlement is reached, the debtor can always opt to file a personal bankruptcy, resulting in less return to the creditors.
Special Considerations for Debtors who Own or Were Directors of Limited Corporations:
Corporate Obligations: Debtors who own or were directors of limited corporations must address all corporate obligations, including tax filings, even if the company is not viable. This includes corporate debts for which the directors/shareholders may be personally responsible. These include corporate debts personally guaranteed by the directors, or debts automatically flowing to directors via "Director Liabilities" such as source deductions, GST, PST, and unpaid wages.
A limited corporation cannot file a consumer proposal itself. But it can file a different type of proposal to keep it operating or wanting to stay operational. However, if a company has shut down, and if there are potential debts flowing to the directors/shareholders, then all of the corporate debts need to be reviewed and accounted for before the directors/shareholders can file a personal consumer proposal. If a shareholder/director wants to file a personal proposal, the company that they owned/operated needs to have all it filings with CRA up to date. This is needed so that the LIT can determine the value of the corporate debt (including tax debts) that will pass to the directors/shareholders.
The corporate debts that a director/shareholders are personally responsible for will be included in their personal proposal. As such, the corporate filings need to be completed so the LIT can accurately determine all personal debt exposure.
Filing for personal bankruptcy before submitting a consumer proposal can offer significant advantages, particularly for debtors with complex financial situations, such as those who were directors or shareholders of companies with corporate debts. Here's a discussion highlighting the benefits of this approach:
- Time to Bring Accounting Records Up to Date: One of the primary benefits of filing for personal bankruptcy first is that it provides debtors with the necessary time to bring their accounting records up to date. This is particularly crucial for individuals who were directors or shareholders of companies with corporate debts, such as GST or payroll remittances, which flow to directors personally through directors' liabilities. Often, the lack of updated accounting records can hinder the filing of a consumer proposal. By initiating bankruptcy proceedings, debtors gain a temporary reprieve from creditor actions, allowing them the necessary time to organize and clarify their financial records.
- Protection from Creditor Actions: Filing for a personal bankruptcy triggers an automatic Stay of Proceedings under the Bankruptcy and Insolvency Act (BIA). This legal provision prevents creditors from seizing assets, garnishing wages, or taking other legal actions against the debtor. The Stay of Proceedings provides individuals with crucial breathing room to focus on resolving their financial affairs without the constant threat of creditor actions looming over them. The Stay also stops interest charges.
- Resolution of Personal and Corporate Debts: Filing for bankruptcy allows debtors to address all their personal debts including any obligations stemming from corporate debts for which they may be personally liable as directors or shareholders. By solidify these debts through a bankruptcy first, debtors can achieve a clearer financial picture and prepare to present a comprehensive consumer proposal to their creditors if they decided that a proposal will work better for them.
- Transition to Consumer Proposal: Once the debtor's financial situation is clarified and their accounting records are up to date, they can proceed to file a consumer proposal under the BIA. The consumer proposal allows debtors to propose a structured repayment plan to their creditors, typically offering reduced payments over an extended repayment terms. This approach provides debtors with an opportunity to negotiate more favorable terms while avoiding the more severe consequences of bankruptcy.
- Annulment of Bankruptcy: Upon acceptance of the consumer proposal by creditors through the normal voting process, the bankruptcy is effectively annulled. From a legal perspective, it is as if the bankruptcy never occurred, and the debtor can move forward with a fresh start and a structured plan for managing their debts.
In conclusion, filing for personal bankruptcy before submitting a consumer proposal can offer debtors several advantages, including the time to bring accounting records up to date, protection from creditor actions, and the ability to address both personal and corporate debts effectively. By strategically navigating the bankruptcy and consumer proposal process, debtors can work towards resolving their financial difficulties and achieving a fresh financial start.
By following these steps and considerations, debtors can navigate the consumer proposal process effectively. With the assistance of a Licensed Insolvency Trustee such as C.E. Craig & Associates Inc., with offices in Victoria, Nanaimo, Langford, and Surrey, you can discuss all debt elimination options and choose the path that will work best for you.
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