The Bankruptcy & Insolvency Act regulates insolvency law in Canada. This legislation governs both business proceedings and personal procedures. In terms of personal insolvency, individuals have three basic legal measures available to them to obtain relief from creditors. The primary types of insolvency proceedings under the Bankruptcy & Insolvency Act include filing personal bankruptcy, a consumer proposal, or a Division I proposal.
All of these proceedings have common outcomes:
- the elimination of overwhelming unsecured debt;
- protection from creditor actions, including court orders and wage garnishments;
- fair and orderly distribution of funds to creditors; and
- all must be filed through a Licensed Insolvency Trustee.
However, how these objectives are achieved differs depending on which proceeding an insolvent individual chooses to file.
Personal Bankruptcy
One significant difference between a consumer proposal and a Division I proposal is that if creditors reject a Division I proposal, the debtor is automatically bankrupt. In a consumer proposal, the debtor can choose to file for bankruptcy or can continue to work with their creditors on their own.Personal bankruptcy is a legal process whereby the insolvent person surrenders certain assets in exchange for a complete discharge of eligible unsecured debts. Not all assets are seized. Provincial legislation sets out certain exemptions which vary by province but cover most basics such as personal belongings, a motor vehicle up to a certain value and, in many provinces, a certain amount of home equity. In addition, while most unsecured debts are completely eliminated through a personal bankruptcy, there are exceptions, including student loans less than seven years old, child and spousal support arrears, court fines, and penalties.
Upon filing for bankruptcy,bankrupts will be required to complete certain duties. These will include providing proof of income and expenses monthly so that the Licensed Insolvency Trustee can calculate the potential surplus income payments due in a personal bankruptcy if they earn income above the legislated threshold.
Technically, there are two types of personal bankruptcy procedures in Canada: a summary administration and an ordinary administration.
A summary administration occurs when the bankrupt’s realizable assets are worth less than $15,000. The vast majority of personal bankruptcies are summary administrations. While the duties of the bankrupt do not change, in a summary administration the trustee is not required to advertise the bankruptcy in the newspaper and the trustee is not required to call a mandated first meeting of creditors.
A bankruptcy becomes an ordinary administration when the bankrupt’s realizable assets exceed $15,000 in value. Ordinary administrations are rare because if an individual has significant assets, or a high enough income to trigger substantial surplus income payments, the Licensed Insolvency Trustee will generally recommend they consider a consumer proposal.
Technically, there are two types of personal bankruptcy procedures in Canada: a summary administration and an ordinary administration.From the bankrupt’s perspective there is little difference between these two bankruptcy procedures, it is more a matter of administration. The bankrupt will be discharged in the same length of time under either a summary or ordinary bankruptcy, although the trustee may not be discharged from his duties under an ordinary administration for a longer period of time.
Consumer Proposal
A consumer proposal is a legal agreement to settle unsecured debts with your creditors filed under the Bankruptcy & Insolvency Act. As part of the process, you file a plan offering to pay your creditors a portion of what you owe over a period of up to five years. To file a consumer proposal, an insolvent debtor must:
- be an individual; corporations have their own procedures; and
- owe less than $250,000 excluding the mortgage on their principal residence.
There are significant differences between a consumer proposal and bankruptcy, which makes this option particularly attractive in certain circumstances. For instance, debtors are not required to surrender any assets, nor are they required to report income and expenses, or make any additional payments beyond what is negotiated in the proposal. In addition, the length of the proposal is determined by the original plan. Debtors have significant flexibility in determining these payments. While proposals can last no longer than 60 months, payment arrangements can include lump sum payments and debtors have the option to complete their payments, and thus their proposals, early.
Creditors have 45 days to vote for or against the proposal or request a meeting. If they vote for the proposal within this period, no meeting is required.
A consumer proposal, filed with a Licensed Insolvency Trustee, provides the same creditor protection and elimination of debts as can be achieved through personal bankruptcy.
Division I Proposal
A consumer proposal is a legal agreement to settle unsecured debts with your creditors filed under the Bankruptcy & Insolvency Act. Individuals whose debts exceed $250,000, and businesses cannot file a consumer proposal but still have the option of making a deal with their creditors through a Division I proposal. Again, the difference is largely administrative. Some additional information is required, including a projected cash flow, and there is a mandatory meeting of creditors. In addition, debtors are still required to submit a payment plan of no more than five years and their debts will be eliminated upon completion. A greater percentage of creditors is required for acceptance than in a consumer proposal.
One significant difference between a consumer proposal and a Division I proposal is that if creditors reject a Division I proposal, the debtor is automatically bankrupt. In a consumer proposal, debtors can choose to file for bankruptcy or can continue to work with their creditors on their own.
As Licensed Insolvency Trustees, we are able to provide options to individuals looking for relief from debts and seeking creditor protection. Today, almost half of all insolvency filings in Canada are consumer proposals. While the choice of which to file will depend on individual circumstances, talking to a Licensed Insolvency Trustee is the best option when struggling with significant debts.
About J. Doug Hoyes
