Area of Law: Credit, Debt and Bankruptcy
Answer # 0275
Division 1 ProposalRegion: Ontario Answer # 0275
What is a Division 1 Proposal?
A Division 1 Proposal is an offer made to creditors by the debtor to change the amount and/or payment terms of the debt. The process is similar to a consumer proposal except it is only available to individuals with debts greater than $250,000 (excluding the mortgage on their main residence). A Division 1 Proposal is a formal procedure under the Bankruptcy and Insolvency Act. The process is carried out through a Licensed Insolvency Trustee (LIT).
What are the terms of a Division 1 Proposal?
Your proposal must include an estimate of what the creditors would receive if you filed for bankruptcy, and, it must offer creditors at least the same amount or better. Although Division 1 Proposals normally follow a five-year plan, they can be for a longer time-period.
The LIT will put together a proposal to:
- lower the amount you have to pay (by offering to pay creditors a percentage of what is owed to them over a specific period of time),
- extend the time the debtor has to pay off the debt, or
- a combination of both.
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How to make a Division 1 Proposal
- Hire an LIT: You must provide your LIT with a complete list of all your assets (property) as well as your debts. Your LIT will discuss your situation and work with you to develop a Division 1 Proposal.
- File the proposal: Your LIT will file your proposal or a notice of intention to file a proposal (NOI) with the Office of the Superintendent of Bankruptcy (OSB). If an NOI is filed, the proposal itself must then be filed within 30 days after the NOI, unless the Court has granted an extension.
As soon as the proposal or NOI is filed, you no longer make any payments to your creditors, and the creditors must stop any actions they have taken against you to collect the debt, such as garnishing your wages or any lawsuits.
- Notify creditors: Your LIT must notify your creditors that an NOI or proposal has been filed within 5 days of it being filed with the OSB.
- Mandatory meeting of creditors: Your LIT will set up a meeting of your creditors. The terms of the meeting are as follows:
- it must be held within 21 days of filing the proposal,
- a vote must be held to decide whether to accept or reject the proposal, and
- for the proposal to be accepted, over 50% of the creditors (representing 66.6% of the debts) must approve it.
The proposal must then be approved by the Court.
If the proposal is accepted
Once creditor and court approvals are obtained, payments will then be made to the LIT, who will use that money to pay each of the creditors, and also take their fee.
In addition, the debtor must continue to make payments to the LIT and meet any other conditions set out in the proposal. If you default on any of the conditions in your proposal, you will immediately be placed into bankruptcy and your creditors can take legal action to recover the money owed to them.
If all conditions are met, you will be legally released from your debts.
If the proposal is rejected
Unlike a consumer proposal, if the Division 1 Proposal is not accepted, the debtor is immediately declared bankrupt from the date of the creditors’ meeting. At that point, creditors can continue, or begin legal action against you to collect the amount you owe.
Advantages of a Division 1 Proposal
The advantages of a Division 1 Proposal to the debtor, include:
- retention of all of your assets
- actions against you by unsecured creditors, such as wage garnishments, will be stopped
- it allows you to solve your financial problems without having to declare bankruptcy
- unsecured debts are paid off at a portion of the original amounts
- often, tax debts can also be paid off at a portion of the original amount
Effect of Division 1 Proposal on debtor’s credit report
From the date the debtor first files a Division 1 Proposal their credit rating is R9, the worst rating available. Upon completion of the proposal, the debtor is legally released from the debt, and will receive a Certificate of Full Performance. Once this happens, the debtor’s credit rating improves and is registered at R7 where it remains for a 3-year period.
For more information about Division 1 Proposals, refer to the Office of the Superintendent of Bankruptcy Canada.
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