Consumer Proposal vs. Division I Proposal

With consumer debt at an all-time high in Canada, many Canadians are considering their options when it comes to debt repayment strategies – options such as debt consolidation, debt management, credit counselling and Consumer Proposals.

Consumer Proposals are a formal alternative to bankruptcy and an increasing number of Canadian consumers file a Consumer Proposal every year. Under a Consumer Proposal, the consumer enters into a new arrangement with his or her unsecured creditors under which interest stops, debts are pooled together (i.e., dealt with at the same time and on the same terms) and in most cases, the total indebtedness is reduced. Most importantly – bankruptcy is avoided.

But not all Canadian consumers qualify to file a Consumer Proposal. Pursuant to Canadian insolvency legislation, if the consumer’s total debt – excluding mortgages owed on their principal residence - is greater than $250,000, a Consumer Proposal is not available. Moreover, if the consumer previously filed a Consumer Proposal and the Consumer Proposal was deemed annulled, the consumer may not file another Consumer Proposal to the same group of creditors without a Court order.

For consumers who do not qualify to file a Consumer Proposal, there is good news. A Division I Proposal is another type of formal proposal available to insolvent consumers and it too is governed by Canadian insolvency legislation. The concept of a Division I Proposal is the same as a Consumer Proposal - that is, that the debtor will have a new arrangement with his or her creditors.  However, there are some key differences when it comes to the administration of a Consumer Proposal versus a Division I Proposal, which are illustrated below:

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Consumer Proposal	Division I Proposal
Available to individuals ("natural persons")	Available to individuals, incorporated entities, partnerships, etc.
Total debt cannot exceed $250,000, except debts secured against a principal residence	No debt ceiling
Terms of consumer proposal must be completed within 5 years	No limits on repayment term
Consumer proposal is deemed approved by the creditors 45 days after filing the consumer proposal, unless a meeting of creditors is required	Proposal must be approved at a duly convened meeting of creditors
A meeting of creditors is required if 25% in dollar value of the proven creditors request a meeting within the 45 day period after filing the consumer proposal	A meeting of creditors is held within the 21 day period after filing the proposal
When a vote is called at the meeting of creditors, the consumer proposal is approved if a majority in dollar value of the voting creditors vote in favour of the consumer proposal	When a vote is called at the meeting of creditors, the proposal is accepted if 2/3 in dollar value and a majority in number of the voting creditors vote in favour of the proposal
The consumer proposal is deemed approved by the Court 15 days following creditor approval, unless an interest party requests a Court review of the proposal	Proposal must be approved by the Court, however in most cases this is a "desk order" application without a hearing
If the consumer proposal is refused by the creditors or the Court, there is no automatic bankruptcy, unless the proposal was filed by an undischarged bankrupt	If the Proposal is refused by the creditors or the Court, the debtor is automatically bankrupt effective the date of creditor or Court refusal of the proposal
Fees and disbursements are set by a federally prescribed tariff	Fees and disbursements are based on actual time and disbursements incurred by the trustee

While the vast majority of formal proposals filed in Canada are Consumer Proposals, a Division I Proposal is available to consumers who either do not qualify to file a Consumer Proposal, or in situations where it is determined that a Division I Proposal will better suit the consumer’s needs (i.e., the consumer needs a repayment period longer than five years).

A Consumer Proposal and a Division I Proposal must be filed through and administered by a Licensed Insolvency Trustee.

For more information about Consumer Proposals and Division I Proposals, contact me directly at 604-637-1599 or lana.gilbertson@mnp.ca.

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