If you are deep in debt, you may feel the best solution for debt relief is personal bankruptcy. It’s important to know that, while bankruptcy is a readily available last resort for debt relief, it’s not your only option.
Before picking bankruptcy, you can try to file a Division 1 Proposal in Canada to resolve your undesirable financial situation. The team of certified trustees at David Sklar & Associates will help you weigh your options and identify if a Division 1 Proposal is the best option for you — which it just might be.
Learn more about what a Division 1 Proposal is, who can get one, and the advantages and disadvantages of filing one.
What Is a Division 1 Proposal?
A Division 1 Proposal is a compromise made between debtors and their unsecured creditors. The proposal’s purpose is to lower the total amount of debts owed, making it easier for the debtor to repay their creditors.
The proposal also helps unsecured creditors because it promises that they will receive more money than if the debtor filed for personal bankruptcy. It’s a mutually beneficial solution both parties can feel good about.
Only licenced insolvency trustees can file and administer Division I Proposals in Canada. The trustee acts as an intermediary between the debtor and the unsecured creditors. They make sure that the debtor follows their repayment plan and that the creditors don’t stray from the terms of the agreement after signing on the dotted line.
Find out more about our Division 1 Proposal services and how you can get the debt relief process started.
Who Qualifies for A Division 1 Proposal in Canada?
A Division 1 Proposal is not intended for everyone. It’s designed for individuals that owe more than $250,000 in debt, excluding the mortgage for their primary residence.
The proposal specifically covers unsecured debt like debt from payday loans, credit cards, money owed to the Canada Revenue Agency, and more. To be eligible for the proposal, an individual should be insolvent — in other words, unable to manage and repay their debts using their current income.
The proposal is also designed for insolvent businesses that owe any amount of debt. A business does not need to have more than $250,000 in debt to qualify. The business can be in any industry, whether it is a small corporation or a large multinational corporation.
The Division 1 Proposal Process
The Division I Proposal process in Canada is complex and varies from case to case. For most businesses and some individuals, it will include:
- Extensive audits
- Extensive cash flow analysis
- Tax liability assessments (federal, provincial & municipal)
- Business operation assessments (including employee & client retention
- Trustee Goes Over All Options: After an insolvent has met with their trustee, and all relevant debt, liability, asset, and income information has been reviewed in detail, the trustee will go over all the options available for debt relief. If both the insolvent and the trustee agree a Division I Proposal is the best choice, they will prepare a proposal together.
- Terms Are Outlined: The proposal will set out the portion of debt the insolvent offers to repay over a given period and other terms they will follow in exchange for being released from the debts included in the proposal.
- The Proposal Is Filed: The trustee then files and submits the proposal to the unsecured creditors.
- Legal Actions End: Once the proposal is filed, the unsecured creditors must:
- Stop all collection efforts
- Stop all legal actions
- Stop charging interest
- Creditors Vote: The creditors vote on whether to accept or reject the proposal. If the proposal is accepted, then the unsecured creditors must not restart collection or legal actions. For a Division I Proposal to be accepted, more than 50% of the creditors who hold more than 66.6% of the unsecured debt must accept the proposal. The Court must also approve of the proposal before it is put into effect.
Note: If the creditors do not accept the proposal, then the person or business filing the proposal is automatically put into bankruptcy. An individual can also be put into bankruptcy if they fail to honour all the agreement terms.
It Keeps You Out Of Bankruptcy
The number one advantage of filing for a Division 1 Proposal is that it keeps you out of bankruptcy. A Division I Proposal allows a person or business to avoid bankruptcy and be released from their unsecured debts after they repay a portion of those debts and honour all their proposal terms.
Bankruptcy carries certain consequences that many debtors want to avoid, like settling major assets, monitoring surplus income, and potentially damaging future job opportunities. Many debtors are worried about filing for bankruptcy because it carries a social stigma, and they’re afraid to be judged by their family, friends, acquaintances and co-workers.
Bankruptcy is an easily recognized term associated with serious financial trouble. On the other hand, the average person won’t know what a Division 1 Proposal is unless they’ve applied for it.
Collection Calls End
Another advantage of the proposal is that, once creditors agree, the regular collection actions must stop. Collection calls will end, accruing interest ends, and legal measures like wage garnishment and bank account freezing will end. The terms of the agreement require creditors to cease all of these actions and allow you to follow the new repayment plan.
The Risk Of Rejection
One of the most significant disadvantages of a Division 1 Proposal is the risk of rejection. If the unsecured creditors don’t agree to the terms and deny the proposal, you automatically move into bankruptcy. There is no alternative strategy, so you will want to make your offer to creditors as enticing as possible to avoid rejection.
Another disadvantage of this proposal is that the process can be overwhelming and complicated. You will have to go through multiple assessments and meetings and get approval from unsecured creditors and the Court to move forward. Businesses will go through more steps than individuals since their financial matters are naturally more complicated.
Alternative Debt Relief Option: A Consumer Proposal
There is a debt relief option other than a Division 1 Proposal to try if you meet the qualifications: a consumer proposal.
A consumer proposal — sometimes called a personal proposal — is a compromise between a debtor and their unsecured creditors to lower the total amount of money owed. It’s designed to make the repayment process easier for the debtor and give the creditors more repayments than if they filed for bankruptcy.
Consumer Proposal VS Division 1 Proposal
These two proposals share the same purpose. They both hope to lower the amount of money owed by a debtor so an individual can manage the repayment without suffering consequences like growing interest, collection calls and legal action.
They are both designed to appease the unsecured creditors, so they don’t feel like they are being denied repayment. Although both proposals attempt to find a happy medium in difficult financial situations, a Division 1 Proposal and consumer proposal has some key differences that you should know.
No Business Applicants
Division 1 Proposals are available for individuals and businesses, but consumer proposals are only available for individuals. This is why businesses have no minimum debt total to qualify for a Division 1 Proposal in Canada.
However, when you complete your payments on time and cross that finish line, all of your debts to these unsecured creditors are considered paid in full. You receive a clean slate, and you can start rebuilding your personal finances from the ground up. You’re officially free from that burden.
There is another way that you can repay your creditors through a consumer proposal: a lump sum. In your proposal, you can offer your creditors a lump sum in place of a long-term repayment plan and get the process settled quickly. Our licensed insolvency trustees will assess your financial situation to see if a lump sum is an appropriate and available option for you.
Total Debt Limit
A consumer proposal has a cap for an applicant’s total debt. An applicant has to have $250,000 (not including a mortgage) or less in debt to qualify. Anyone who reaches over that set limit is automatically disqualified from the process and has to look for another relief strategy.
If you do owe too much to qualify for a consumer proposal, the two options you have are to apply for a Division 1 Proposal or file for personal bankruptcy. These options don’t have maximums. A Division 1 Proposal applicant would normally have more than $250,000 (not including a mortgage) in debt but can file with less. Someone filing for bankruptcy should have more than $1,000 in debt that they cannot afford to repay.
The Proposal Process
Another significant difference between consumer proposal services and a Division 1 Proposal is the process. In a consumer proposal, you work with a licensed insolvency trustee to put together the proposal that will appeal to your creditors and work with your budget. The trustee files it with the Office of the Superintendent of Bankruptcy and then submits it and a report of your finances to the unsecured creditors you want to include.
The creditors have 45 days to accept or reject it. If they accept, then it takes another 15 days before the Court agrees with the proposal.
After receiving acceptance, the agreement becomes legally binding. You will have to follow the conditions set up in the proposal, make the required payments and attend two credit counselling sessions before the process is considered complete.
If creditors reject your original proposal, you have an opportunity to make changes with the help of the trustee and then resubmit it. They may accept the modified terms but, if they still don’t like the new-and-improved proposal, you have the choice to look for other forms of debt relief before filing for personal bankruptcy.
In a Division 1 Proposal, once the creditors accept the proposal, it must then be brought before the Court for acceptance. If either the creditors or the Court rejects the proposal, the debtor will be immediately placed into bankruptcy.
Why Is it Important to Learn About These Proposals
Knowing Your Options
It’s always wise to have a back-up plan whenever you’re in a difficult situation. Think of it like having emergency exits in your house. When disaster strikes, you want to know what options you can take to get out as quickly and safely as possible. If the front door is blocked, you can run to the backdoor, or you can slide out of a first-floor window. You’re not trapped.
Knowing exactly where those alternative exits are will ease your anxieties about the worst-case scenario and make it easier to tackle that scenario if it ever happens.
If you ever feel like you’re dealing with the worst-case scenario regarding your finances, know that you can come to us to discuss the possibility of filing a Division 1 Proposal or a Consumer Proposal. One of them could be your emergency exit.
Ending The Cycle
According to a recent survey released by The Manulife Bank of Canada, two in five Canadians don’t expect to be able to pay off their debts within their lifetime. It’s going to be a life-long worry for them and their families to deal with — and that’s a terrible expectation to carry with you for the rest of your life.
Every Canadian should know there are ways to end their debt cycle and create a life of financial stability. No one should have to accept that they will have the burden of debt forever.
The Rise In Consumer Debt
The rates of consumer debt are rising in Toronto due to sky-high costs of living, interest rate hikes and income stagnation.
Too many people in the Greater Toronto Area are finding that their annual incomes can’t match their everyday needs, let alone the outstanding debts they have to tackle.
Since these contributing factors don’t appear to be changing, consumer debt will not get resolved anytime soon.
More consumer debt leads to more insolvency filings. According to Better Dwelling, the rates of insolvencies in the Greater Toronto Area rose by 26% in 2019 and increased 22% in Ontario. The rates are accelerating, and they aren’t likely to drop.
The average Canadian will not know that there are solutions like Division 1 Proposals out there when dealing with severe debt. Now you know there are alternatives to bankruptcy that can help you handle your heavy debt load and bring you to a more financially stable state.
A little bit of research and professional help can save you a lot of stress in the long-run. The trustees at David Sklar & Associates will walk you through your options for debt relief. Get in touch and book a consultation.