HOW SHOULD A CREDITOR RESPOND TO A CONSUMER PROPOSAL?

Transcription

1 HOW SHOULD A CREDITOR RESPOND TO A CONSUMER PROPOSAL? Michael S. Myers Papazian Heisey Myers Divisin II - Cnsumer Prpsals are gverned by sectins f the Bankruptcy and Inslvency Act (the BIA ). This paper is a nn-technical rewrking f these sectins. Reference t the actual prvisins f the BIA is always recmmended. Divisin II f the BIA establishes a system fr inslvent debtrs t make cnsumer prpsals, rather than file fr bankruptcy prtectin. Cnsumer prpsals are: an alternative t persnal bankruptcy nly available t individuals wh are inslvent and wh have unsecured debt between $5,000 and $250,000 in the aggregate (nt including debts secured by the individual s principal residence) in essence, an ffer by a debtr t his r her unsecured creditrs, r t all f his r her creditrs generally, t nly repay a prtin f the utstanding debt; either in a lump sum r ver a perid f time (which cannt exceed 5 years) usually made t the unsecured creditrs nly and therefre, usually include a prvisin that all f the secured creditrs claims will be fully paid as and when due. As such, I will assume in this paper that the cnsumer prpsals mentined are directed t the unsecured creditrs nly available t bankrupt individuals, as a way f aviding (r getting ut f ) bankruptcy NOTE 1: Once the cnsumer prpsal is fully satisfied, nne f the creditrs have any claim against the debtr fr the unpaid balance f their debt (subject t sectin 178 f the BIA) HOW DOES A CONSUMER PROPOSAL GET STARTED a cnsumer prpsal starts with a debtr s visit t a trustee in bankruptcy

2 2 the trustee, acting as a 'Prpsal Administratr', will review the debtr's financial situatin and nce satisfied with the debtr s eligibility, wrk ut a prpsal with the debtr; being a legally binding ffer t repay t all f the debtr's unsecured creditrs, pr-rata t each ther, a prtin f their debt ver a perid f time the Prpsal Administratr will prepare the requisite Cnsumer Prpsal frms under the BIA and send them t each f the unsecured creditrs and t the Superintendent f Bankruptcy WHAT THE DEBTOR DOES The Debtr shall: include all unsecured debts in the cnsumer prpsal (n cherry picking allwed) immediately stp making regular payments t the unsecured creditrs attend any meeting f creditrs attend tw cunseling sessins cntinue t wn all f his and her assets and cntinue t keep all f his r her incme fulfill the terms and cnditins f the cnsumer prpsal WHAT THE CREDITORS DO Each creditr shall: stp all cllectin activities (nte that secured creditrs may enfrce their security upn default in payment) file a prf f claim with the Prpsal Administratr have 45 days within which t request a meeting f creditrs (if cnsidered necessary r desirable by the creditr) attend at any creditrs meeting and vte t apprve r t reject the prpsal

3 3 WHAT ARE THE MECHANICS OF APPROVING OR REJECTING A PROPOSAL each creditr has 45 days frm the date f the prpsal within which it can file a Prf f Claim and request a meeting f creditrs the Office f the Superintendent f Bankruptcy may als request a meeting f creditrs, but rarely des s if creditrs hlding in the aggregate 25% f the ttal unsecured debt request a meeting f creditrs (within the 45 day perid) then the Prpsal Administratr shall hld a meeting f creditrs within the next 21 days at the creditrs' meeting, creditrs may ask questins f the debtr and, mst imprtantly, may vte t either accept r t reject the prpsal the prpsal shall be accepted if: there is n qurum at the creditrs' meeting, OR if creditrs present at the meeting (either represented in persn r by prxy) hlding mre than half f the dllar value f the debt wing t all creditrs at the meeting, vte t accept the prpsal if creditrs hlding mre than half f the dllar value f the debt wing t all creditrs at the meeting vte t reject the prpsal, then the prpsal is rejected NOTE: Often, n creditrs request a meeting f creditrs t be held r, if ne r mre creditrs request a meeting, but their aggregate debt des nt exceed 25% f all unsecured debt, then there shall be n creditrs meeting. In either case, if there is n creditrs' meeting, then the prpsal is deemed t have been accepted n the 45th day after the making f a prpsal

4 4 IF THE CONSUMER PROPOSAL IS ACCEPTED OR DEEMED ACCEPTED any creditr r ther interested party may, within 15 days, request the Prpsal Administratr t apply t the Bankruptcy Curt in rder t review the prpsal if n such request is made within such 15 day perid, then the prpsal is deemed t have been apprved by the Curt the stay f prceedings n all unsecured creditrs cntinues the debtr must fulfill all terms and cnditins f the prpsal IF THE CONSUMER PROPOSAL IS REJECTED the prpsal is terminated the stay impsed n all unsecured creditrs is autmatically lifted the debtr is free t file anther prpsal r t assign him r herself int bankruptcy (r t d neither) WHAT HAPPENS UPON DEFAULT a cnsumer prpsal is annulled: if the cnsumer prpsal prvides fr mnthly (r mre frequent) payments, and three payments are in default OR if the cnsumer prpsal prvides fr payments less frequently than mnthly, and there has been a default fr three mnths r mre if the annulled cnsumer prpsal was filed by a debtr wh was nt a bankrupt, the creditrs may cntinue t cllect their debts less, f curse, any dividend amunts received during the prpsal

5 5 if the annulled cnsumer prpsal was filed by a bankrupt, then the cnsumer debtr is deemed t be bankrupt ADVANTAGES OF A CONSUMER PROPOSAL TO THE DEBTOR: A cnsumer prpsal can be advantageus t a cnsumer debtr as it may allw the cnsumer debtr t avid bankruptcy. Remember, the cnsumer prpsal: stays all debt cllectin actin and prceedings (including executin and garnishment) see s. 69.2(1) f the BIA allws the debtr t keep any equity in his r her hme (unlike bankruptcy) allws the debtr t keep all assets (unlike bankruptcy) allws the debtr t keep all f his r her persnal and family surplus incme (unlike bankruptcy) allws the debtr t cntinue t make hme mrtgage and secured debt payments utside f the prpsal cmpletely wipes the slate clean - cancels all unsecured debt after cmpleting all prpsal payments; which usually amunt t 20% (but smetimes mre) f the aggregate unsecured debt (subject t sectin 178 f the BIA) TO THE UNSECURED CREDITORS: A cnsumer prpsal can be advantageus t the unsecured creditrs f a cnsumer debtr, as the cnsumer prpsal: greatly increases net receipts frm the debtr (which is ften nly 1% - 2% payut n a typical bankruptcy)

6 6 can minimize cllectin csts (fr example, n need t sue t judgment and then enfrce the judgment by, say, garnishment - which may then be shared by all judgment creditrs, in any event) CREDITORS BEWARE creditrs' packages frm trustees can be very cnfusing; and ften lead ne t believe that bjecting t a prpsal is the same as vting t reject a prpsal. IT IS NOT!! if a creditr intends t reject the prpsal: the creditrs must specifically, in writing, request a meeting f creditrs (and ensure that creditrs with at least 25% f the prven debt d likewise) then the creditr must attend at the creditrs meeting (either in persn r by prxy) finally, the creditr must vte n at the creditrs' meeting HOW TO DEAL WITH A CONSUMER PROPOSAL a creditr shuld review the prpsal package in detail, paying particular attentin t the stated equity in the debtr's hme and t the debtr s stated family incme. There are sme quite wealthy individuals wh try t sneak thrugh a prpsal!! file a prf f claim with the Prpsal Administratr immediately if the creditr has 25% (r mre) f the debt, call a meeting f creditrs talk t the trustee and find ut the ttal dllar value f claims with respect t which a prf f claim has been filed, and if the creditr has less than 25% f the prven debt, cntact ther creditrs (ask the Prpsal Administratr fr cntact infrmatin) and slicit supprt fr the calling f a creditrs meeting. There is n dwnside t calling a meeting, s there is rarely any bjectin amng creditrs t the calling f a meeting

7 7 if yu think that the debtr is 'pulling a fast ne' r can affrd t pay mre than ffered in the prpsal, advise the Prpsal Administratr that yu intend t vte n at the creditrs meeting remember, that the Prpsal Administratr des nt get paid if the prpsal fails, s the Prpsal Administratr is usually an asset in negtiating larger payments (when apprpriate) Curts thrughut Canada have identified nn-gvernment insured lans t students (advanced r made available in rder t assist thse students in btaining a prfessinal degree such as Dctrs and Chirpractrs and Dentists) as having a special status because: the lan was made t the student while the student was in schl with little r n ability t repay the lan was nly intended t be repaid after graduatin - when prfessinal incme permits payment if a prfessinal files fr bankrupt prtectin, he r she keeps his r her prfessinal degree... and thus it wuld be unfair t allw a bankrupt t cmpletely walk away frm the student lan that allwed him r her t btain the degree THEREFORE, as a parting thught, if a prfessinal whether a student r new graduate - files a cnsumer prpsal, any creditr wh paid fr all r a part f that student s r that graduate s prfessinal degree ught t review all f the facts very carefully, as bankruptcy may nt be a viable ptin and as such, the student r new graduate debtr may very well be mre willing than mst t increase the prpsal - rather than see it rejected.