In the financial world, there are a number of terms that explain different scenarios that you may face with your finances throughout your life. While most people understand what bankruptcy means, not everyone knows that there are alternative steps that can be taken that allow you to avoid full-blown bankruptcy. One of these is a Division 1 Proposal.

Division 1 Proposal Defined

A Division 1 Proposal is a legal process that allows you to avoid declaring bankruptcy. Both individuals and businesses can use Division 1 Proposals to help them solve a debt crisis. It falls under the Bankruptcy and Insolvency Act.

As part of the process, you will be settling the debt you have acquired with your creditors. This is most often used when the debt you have added up is over $250,000. One of the main advantages of a Division 1 Proposal is that it enables you to avoid bankruptcy, which can be a drawn-out process. The pros of a proposal for your creditors is that they will see a higher payout than they would if you declared bankruptcy.

One thing to keep in mind when it comes to Division 1 Proposals is that, while your debt will be considered settled, your credit rating with be R7 for 3 years after completion of your consumer proposal. An R7 rating shows lenders that you have filed a proposal, and they may consider you a higher risk. This can hinder your chances of finding a lender willing to deal with you. It can also mean you will pay higher than average interest rates.

However, if you are swimming in debt and will not be able to get out in the foreseeable future, a Division 1 Proposal may be what you need to get your finances back on track.

Do you qualify for Division 1?

There are two categories of debtors that will be able to use Division 1 Proposals. They are:

1. Professional services

   Individuals like doctors or lawyers who are considered self-employed by the Canadian Revenue Agency (CRA) fall under this category. They may find themselves in trouble with the CRA if they have not paid their taxes or if the government reassesses their income tax returns and finds they owe more than was initially filed.

   Scenarios like this often come with penalties and fees that can be daunting. The debt can be crippling, and so, professionals may make a Division 1 Proposal with the hopes of getting right with the CRA. The CRA does offer a Fairness Package; however, these Proposals are not often successful because of the heavy requirements.

2. Business owners

   If your venture is failing, you may consider a Division 1 Proposal. This would allow you to hold on to any personal assets and settle their business debt, avoiding bankruptcy. Different types of businesses can take advantage of this process, including a corporation, sole proprietorship, or a partnership.

Steps to a Division 1 Proposal

If you are thinking of making a Division 1 Proposal, it’s important to understand the process involved. There are a number of steps that happen, which include:

1. Create your Division 1 Proposal

Meet with a trustee to determine what the situation is, how large the debt is, what options are available to alleviate the debt, and what the creditors would likely settle for.

A Division 1 Proposal is then created, and you will need to sign it. You may also be expected to supply other documentation. The proposal is then filed with the Office of the Superintendent of Bankruptcy (OSB). Your trustee will make an appointment to meet with creditors no later than 21 days after the proposal is filed.

2. Your creditors vote on your proposal

A draft of the proposal is supplied to your creditors so they can review it before the meeting. During the meeting, your proposal will be discussed, and your creditors will discuss the pros and cons.

They may also ask you for more details about your situation. Following the discussion, a vote will be taken. This is where your creditors get to vote in favour of or against your proposal. The following criteria will determine an approval vote:

• A majority vote of the creditors.
• Two-thirds in value of the claims of the creditors.

It’s important to note that if the vote does not pass, you will automatically be considered bankrupt. However, what usually happens during the meeting discussion is that your creditors may negotiate different terms than you originally put in your proposal.

It’s like a bargaining table where you can all define the terms that you will be willing to live by. Once those terms have been defined, your creditors vote on the amended version of your proposal. Keeping in mind that they had an opportunity to amend the proposal to include terms they will be happy with, it’s likely that the vote will pass.

3. The Bankruptcy Court reviews the proposal

Once the proposal has passed the vote, a court date is set. This allows the Bankruptcy Court to review the proposal. It will be reviewed for fairness to those impacted by the proposal, as well as ensuring it abides by the statutory requirements.

After the court has approved your proposal, it will be your responsibility to meet the terms in it. Once you have done so, your trustee will issue you a Certificate of Full Performance of Proposal.

4. The approved proposal is filed with the OSB

Following you earning a Certificate of Full Performance of Proposal, the certificate is then filed with the OSB. Between when you made the proposal and you were given the certificate, your credit rating was an R9, which is as low as it can go. Now, however, your credit rating is adjusted up to an R7.

While the process may seem complex, a Division 1 Proposal can help you avoid bankruptcy.

For more information about Division 1 Proposals, call Charles Advisory Services at 416-486-966 or contact us here.