Most people are familiar with the concept of bankruptcy.
Creditors are owed money assets are liquidated and the liquidation
proceeds are paid to creditors. The process is usually very
difficult for the person filing bankruptcy as his/her assets may
consist of a family home or a cottage, which possibly has been in
the family for generations. The disruption can be devastating for
the family and their children.
The Bankruptcy and Insolvency Act (BIA), the federal
statute that governs bankruptcy and restructuring in Canada,
provides an option other than bankruptcy.
The BIA allows an insolvent person whose aggregate debts are
less than $250,000 (not including mortgages on residential
property) to file what is known as a "consumer proposal".
A consumer proposal is not the same as bankruptcy, even though they
are both governed by the same laws.
A consumer proposal is a formal settlement between a debtor and
his/her creditors of all unsecured debts for an agreed upon amount.
The settlement does not have to be for the full amount of all debts
but can be for a fraction of the total owed. The debtor makes one
monthly payment to the administrator of the proposal, who in turn
makes dividend payments to the creditors.
More specifically, a person who is unable to meet their monthly
debt payments meets with a qualified professional, who administers
consumer proposals, and they discuss the ability of the debtor to
make monthly payments. Together, they review the monthly income and
expense statement of the debtor, as well as his/her net worth, to
determine how much the debtor is able to pay each month. Once a
monthly amount is determined the administrator notifies the
creditors and helps to finalize a settlement agreement between the
debtor and the creditors. Fifty percent (in dollar value) of the
creditors must vote to accept the proposal for it to become binding
The main difference between a consumer proposal and a bankruptcy
is that in the case of the proposal the debtor's assets are not
liquidated. The debtor receives the same protection from creditors
and collectors but retains control of his/her assets. The two
obvious benefits are that there is no loss of assets and no family
One might ask "Well why don't I just call all my
creditors and work out my own settlement?" This will not
necessarily work because, for example, if you have five creditors
and you are able to settle with only three of them, the remaining
two are not forced to settle. They can still pursue you for the
amounts they are owed. In a consumer proposal, all creditors are
dealt with together and receive the same payment plan. As consumer
proposals are governed by federal law, any settlement is enforced
by the courts and creditors are required to accept the settlement
in full and final satisfaction of all debts. So the debtor gets to
keep his/her assets, he makes monthly payments to satisfy all debts
over time and the creditors receive payments, which are greater
than what they would have received if the debtor had filed
Consumer proposals comprise an increasingly large percentage of
overall personal insolvency filings in Canada. For records ending
November 30, 2010, 31% of all consumer insolvencies in Canada were
consumer proposals.1 This is up dramatically from ten
years ago when the majority filed for bankruptcy, having had no
knowledge of the alternative.
In today's economic environment, it's important that
people know what options they have to deal with debt. Canada's
insolvency laws mean that today, "Proposals are not just for
The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
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