The Consumer Proposal That Competes With a Bankruptcy
Your client is an individual with $210,000 in unsecured debt: $120,000 in credit cards, $60,000 in a personal guarantee of a failed business lease, and $30,000 in a judgment obtained by a former supplier. He owns a home with $90,000 equity, a vehicle worth $12,000 (exempt to $7,000 in Ontario), and RRSPs of $45,000. He earns $95,000 annually and has $1,200 monthly surplus income. A licensed insolvency trustee has proposed a consumer proposal of $600 per month for 60 months ($36,000). One creditor holding $80,000 of the debt has indicated it will vote against. The client asks whether the proposal can pass, what happens if it fails, and whether bankruptcy is better.
1. Will the consumer proposal pass, and what are the voting mechanics?
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A consumer proposal is accepted if a majority in number and a majority in dollar value of the proven creditors voting approve it. The threshold is not unanimity, so a single large creditor cannot block a proposal by itself unless it controls a majority of value.
Here the opposing creditor holds $80,000 of $210,000 - about 38% of value. It cannot alone defeat the proposal. But the arithmetic matters: if the remaining $130,000 in value votes in favour, the proposal passes on value. The client should identify the composition of the creditor body and canvass support before the meeting.
The $600 monthly payment over 60 months ($36,000) should be tested against the alternative. In a bankruptcy, the estate would realize the non-exempt equity in the home (subject to the trustee's assessment and any exemptions), the non-exempt vehicle value ($5,000), and surplus income payments based on the Superintendent's standards. The RRSPs are generally exempt if they are RRSPs (not RRIFs) and the contributions were not made in the 12 months before bankruptcy.
Advise: the proposal is likely to pass if the other creditors support it, but the trustee should present the comparison to creditors honestly. If the proposal fails, the client may amend it or proceed to bankruptcy.
2. Compare the consumer proposal and bankruptcy outcomes for this client, including the home and surplus income.
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Consumer proposal: the client keeps all assets, including the home and vehicle, and pays $36,000 over five years. The proposal stays on his credit record for three years after completion (or six years from filing, whichever is later). Creditors are stayed. The guarantee debt is included if the creditor is an unsecured creditor.
Bankruptcy: the trustee would assess the home equity. Ontario exemptions do not protect home equity, so the $90,000 equity is at risk unless the client can arrange to purchase it from the estate or a family member can. The vehicle exemption is $7,000 (or a prescribed amount), so $5,000 is exposed. Surplus income of $1,200 monthly over a 21-month (or longer, if income is above the threshold) period could total $25,000 or more. The RRSPs are generally exempt if they are RRSPs and contributions predate the 12-month period.
On these numbers, the proposal is likely the better outcome: it preserves the home and vehicle and avoids surplus income payments. The cost is five years of payments and a longer credit impact. Bankruptcy offers a faster discharge (9 months for a first-time bankrupt with no surplus income, but surplus income extends it) but risks the home.
Advise the client to obtain a written comparison from the trustee and to consider whether a family member can assist with a lump-sum proposal, which creditors often prefer.