PROPOSALS TO CREDITORS FAQ
How do I know if I can file a proposal?
What are secured and unsecured creditors?
How does a Consumer and/or Division I Proposal work?
How do I know how much of a monthly payment to offer my creditors?
To whom do I make payments?
What happens to my creditors when I file a proposal?
What about my house and car?
How does a proposal affect guarantors and co-signers?
Do I have to surrender my credit cards?
Are any debts not forgiven with a consumer proposal?
What happens if I am unable to make some of the payments for the proposal?
How long will my Consumer Proposal last?
What happens to my debts at the end of my proposal?
How will my credit rating be affected in the future?
How do I know if I can file a proposal?
You can file a Consumer Proposal if you owe $250,000 or less (excluding your home mortgages) and are unable to pay your debts when they are due.
If your debts are more than $250,000 and you are unable to pay them, you can file a Division I Proposal.
What are secured and unsecured creditors?
Secured creditors have a charge on an asset, such as a mortgage on a house, or a bank or finance company holding security on your car. You usually have a choice as to whether or not you wish to include a secured creditor in your Consumer or Division I Pproposal. For example, if you have a loan against your vehicle that you are unable to pay, you can include that loan in your Proposal. That means that the lender would repossess the vehicle and you would no longer be required to repay the loan. Or, if you want to keep your financed vehicle, you can often do that even if your other debts are included in a Proposal. You would continue to make your vehicle loan payments just as you’re doing now, and you would keep the vehicle under the terms of your loan agreement.
Unsecured creditors are those that have no charge on an asset, such as credit cards, bank account overdrafts, Canada Revenue Agency for income tax or GST arrears,lines of credit, etc. Consumer and Division I Proposals are designed to deal effectively with these and any other unsecured creditors you may have.
How does a Consumer and/or Division I Proposal work?
There are five key steps to securing a proposal:
- Contact a bankruptcy trustee. Contact a bankruptcy trustee. An MNP trustee can assist you in developing a formal payment arrangement, for your debts. MNP will prepare your Proposal and present it to your creditors. If your Proposal is accepted by the creditors, you then make the payments called for in the Proposal and, once you have completed those payments, you are released from your debts. So, the proposal enables you to modify the payment arrangement with your creditors by reducing the amount to be paid and/or giving you a longer time to pay.
A Consumer or Division I Proposal is a settlement with your creditors that is governed by federal law. Most Proposals done by individuals are a series of fixed (and manageable) monthly payments over a period of time. In some cases, you may agree to surrender assets such as investments, surplus vehicles, etc., in order to make the Proposal fair to creditors based on your ability to pay. Proposals are flexible and can contain other terms as agreed upon between you and your creditors.
- Notice to Creditors. Upon filing your Proposal, you are immediately protected from collection action on most debts and you would cease making payments on those debts. MNP will mail to your creditors a copy of your proposal, along with our report on the Proposal and enough of your financial information to allow your creditors to properly assess your settlement or consolidation offer. Our report must give an opinion as to whether we believe the Proposal to be fair to your creditors and whether we believe that you have the resources to make the payments called for in the Proposal.
- Acceptance of Proposal. Acceptance of Proposal. Your creditors will have a period of time to assess your Proposal and cast their votes. This period is 45 days for a Consumer Proposal and 3 weeks for a Division I Proposal, although it is possible to extend these time limits. So, in most cases you will know the results after that 45 day or 3 week period.
If your Proposal is accepted by your creditors, you then proceed to make the agreed upon payments and abide by any other terms that were agreed to in the Proposal
In order for your Proposal to be accepted, your creditors typically need to be satisfied that: the amount offered is fair to them based on your ability to pay; that the Proposal is more beneficial to them that a bankruptcy; and that your dealings with them have been honest.
If your creditors are not willing to accept your proposal: If it s a Consumer Proposal, you are no longer protected from collection action and you may need to consider bankruptcy as an effective way of dealing with your debts. If it is a Division I Proposal, you will automatically be placed into bankruptcy if it is not accepted.
Once your Proposal has been approved by creditors, MNP must seek Court approval of the Proposal. In many cases, this approval is automatic.
- Payments. Upon approval of your Proposal you will then proceed to make the payments called for in the Proposal and to meet any other terms that were agreed to in the Proposal. Once you have completed the terms of your Proposal, you will receive a compliance certificate and be released from any further payment obligations to your unsecured creditors on any remaining balance of your unsecured debts.
- Completion. Completion. Once you have made all payments that were agreed to in the Proposal and once you have met any other terms that were agreed to in the Proposal, you will receive a Certificate of Full Performance confirming that you have successfully completed your Proposal. Under federal law, that means that you have no further obligations to pay the creditors who were dealt with in the Proposal.
How do I know how much of a monthly payment to offer my creditors?
A proposal to your unsecured creditors must provide more money to your unsecured creditors than they would otherwise receive if you filed for bankruptcy.
By completing a financial assessment, we can determine the amount of money you can afford each month to make payments under your proposal for the benefit of your unsecured creditors. For your proposal to succeed, you must have regular employment income and sufficient income remaining after paying your monthly living expenses to make monthly payments to your bankruptcy trustee for your unsecured creditors.
The government provides guidelines to assist us in determining whether you have surplus income—depending on the number of members in your household and your total family income.
If you do not have surplus income under the guidelines, your proposal will probably not be approved by creditors unless friends or family members assist you by providing monthly payments or a lump sum deposit to fund the proposal. You also have the option of cashing in RRSPs in order to fund a proposal.
Proposals are designed to be as flexible as possible and can be customized to your situation, e.g. monthly payments do not have to be fixed. Anything you suggest and the creditors agree to can be included in the proposal.
The type of proposal offered can also vary considerably depending on where you live. Whichever situation you find yourself in, your MNP bankruptcy trustee can advise you on the best option for you.
To whom do I make payments?
Once your proposal is accepted, all payments called for in the Proposal will be made to your MNP Trustee. The Trustee will periodically distribute these funds to your creditors as called for in the Proposal.
What happens to my creditors when I file a proposal?
When you file a proposal, unsecured creditors deal directly with your MNP Trustee and must stop contacting you directly. If an unsecured creditor continues contacting you, you should notify your MNP Trustee immediately.
What about my house and car?
Usually secured creditors are not affected by a proposal. In most cases, you will continue to make payments to your secured creditors as per your usual arrangements.
If, however, you elect in your proposal to surrender secured assets and cease making payments to secured creditors, they will be entitled to recover the assets pledged to them as security. In these circumstances, any resulting shortfall that may arise from the sale of the asset held as security by the secured creditor will be included as unsecured debt in your proposal. Accordingly, you will not be responsible for any further payments to the secured creditor.
How does a proposal affect guarantors and co-signers?
Filing a Proposal will not stop creditors taking collection action against guarantors or co-signers for the remainder of the debt owed. Any payments received by those creditor from your Proposal must be applied to reduce the amount they are attempting to collect from the co-signor or guarantor.
Do I have to surrender my credit cards?
Yes, your credit cards will be returned to the issuing companies.
Are any debts not forgiven with a consumer proposal?
The following debts are not released in a Proposal unless the Proposal specifically states that the debt will be released and the creditor who is owed these funds accepts the Proposal):
- Court fines, penalties and restitution orders
- Any award by the Court for bodily harm inflicted intentionally, sexual assault or wrongful death
- Alimony, child support and maintenance
- Any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity
- Any debt or liability for obtaining property under false pretences or fraudulent misrepresentation
- Liability for any dividend a creditor would have been entitled to receive when you fail to disclose the creditor to your trustee
- Student loans, if you ceased to be a student (i.e., ended your studies) less than 7 years before the filing of your Proposal. In cases of hardship, the Court can reduce this period from 7 years to 5 years.
What happens if I am unable to make some of the payments for the proposal?
You would first contact your MNP Trustee. In certain cases, it may be possible to obtain a deferral of payments. The las provides that, if you miss three monthly payments under a Consumer Proposal, the Consumer Proposal is annulled and it is no longer in effect. If that occurs, your creditors can resume collection action. However, it is possible to have your Consumer Proposal “revived” or reinstated by your MNP Trustee or by the Court A reinstatement means that your Consumer Proposal is still in effect and you can continue on to completion. A reinstatement also means that creditors are again stopped from taking collection action.
In a Division I Proposal, if you become more than 30 days in default (i.e., late) on any obligation you have in the Proposal, the creditors or your trustee then have the right to apply to Court to have your Proposal annulled, placing you into bankruptcy. In many cases, this right is not exercised and, even after a default you may be able to continue to complete your Proposal. Also, if you contact your MNP Trustee before a default occurs, it may be possible to obtain a deferral, allowing you more time to meet your obligations.
How long will my Consumer Proposal last?
A Consumer Proposal cannot last more than five years, but the exact length depends on the type of proposal you make. Your MNP Tustee can give you advice on your particular circumstances.
What happens to my debts at the end of my proposal?
Other than the debts already mentioned, all unsecured debts are forgiven once you have completed the terms of your Proposal. Secured debts, such as a mortgage on your house or a charge on your car, will remain unless you have chosen to surrender the security to the secured creditor in your Proposal.
How will my credit rating be affected in the future?
Filing a proposal will lower your credit rating. It is important to note, however, that this rating will not be as low as it would for those who file bankruptcy. In order to encourage a proposal, bankruptcy is removed from your credit history after six years, whereas a proposal is typically removed three years after you finish.
For more information on making a proposal to creditors, contact an MNP bankruptcy Trustee or insolvency professional.