Getting a consumer proposal rejected does not mean you automatically become bankrupt. If a creditor asks for different terms or the proposal is ultimately rejected, your Licensed Insolvency Trustee can review the response with you, determine whether an amended proposal is realistic, and explain your other debt options.
Creditor review is not a simple yes-or-no step. A creditor can accept, object, request a meeting, or propose different terms. A large creditor can also have significant influence because votes are based on the dollar value of proven claims.
What Happens During the 45-Day Creditor Review Period?
After your Licensed Insolvency Trustee, or LIT, files the consumer proposal, your creditors receive the proposal and information about your financial situation. Creditors then have 45 days to respond.
During this period, a creditor can indicate that it accepts or opposes the proposal and can request a meeting of creditors. A meeting must be called if creditors holding at least 25% of the value of proven claims vote against the proposal and request a meeting, or if the Office of the Superintendent of Bankruptcy directs that a meeting be held.
If no meeting is required within the 45-day period, the proposal is deemed accepted by the creditors. That means an objection on its own does not necessarily defeat the proposal.
For a broader explanation of the process from filing onward, see what happens when you file a consumer proposal.
How Does Creditor Voting Work in a Consumer Proposal?
If a meeting of creditors is called, voting is based on the dollar value of proven claims, not simply the number of creditors. A proposal is accepted at the meeting if the required simple majority of the dollar value of proven claims voting supports it. The Office of the Superintendent of Bankruptcy describes this as 50% plus one of the dollar value voting in favour.
The balance owed to each creditor can therefore matter as much as the number of creditors. Someone with $60,000 owing to one bank and $10,000 spread across three other creditors is in a different negotiating position from someone whose debt is divided fairly evenly among several lenders.
The LIT’s job is to review the full financial picture before the proposal is filed and provide creditors with the information needed to evaluate whether the offer is fair, reasonable and viable.
Why Might a Creditor Reject or Counter a Consumer Proposal?
A creditor may oppose an offer because it believes the proposed return is too low, the financial information suggests the debtor can reasonably afford more, or the creditor believes it would recover more in a bankruptcy.
There is no universal repayment percentage that every creditor will accept. A proper proposal depends on the person’s income, necessary household expenses, assets, debts and the estimated recovery creditors could receive under other insolvency options.
Current guidance from the Office of the Superintendent of Bankruptcy reinforces this point. LITs are expected to provide creditors with analysis comparing the proposal with a potential bankruptcy, including asset values, available equity, surplus income calculations where applicable, and known co-signed or guaranteed claims.
That comparison can be especially important when a debtor owns a home, has other assets with realizable equity, expects a confirmed increase in income, or has financial circumstances that could materially change creditor recovery.
The offer also has to be workable for the debtor. A higher payment does not solve the problem if it leaves the household unable to pay rent, groceries, utilities, transportation or other necessary expenses.
If you are still estimating what a proposal might look like, Caplan’s consumer proposal calculator can provide a starting point. It is an estimate, not a creditor-approved offer.
What Happens If a Creditor Makes a Counteroffer?
A counteroffer means the creditor is asking for changes before it will support the proposal. In many cases, the question becomes whether amended terms can satisfy creditors without creating a payment the debtor cannot realistically maintain.
Your LIT can explain what the creditor has requested, how that request compares with the financial information in your file, and what an amended proposal would mean for your monthly payment and total repayment.
You should look at the entire revised obligation rather than focusing only on the monthly amount. A small monthly increase can become significant when it is multiplied over several years.
It is also reasonable to ask your LIT:
- What changed between the original offer and the creditor’s requested terms?
- How does the proposed recovery compare with what creditors might receive in bankruptcy?
- Is the new payment supported by my actual household budget?
- Has a creditor relied on an asset value, income figure or debt amount that needs to be updated?
- What happens if I do not agree to the counteroffer?
An amended proposal should still fit your actual household budget. Creditor approval is of little value if the payment is likely to fail.
What Happens After a Consumer Proposal Is Rejected?
If a consumer proposal is rejected, you are not automatically bankrupt. That is an important distinction between a consumer proposal under Division II of the Bankruptcy and Insolvency Act and a Division I proposal.
The Office of the Superintendent of Bankruptcy states that when a consumer proposal is not accepted, changes may be made and the proposal may be resubmitted, or the debtor may consider other options for dealing with the debt, including bankruptcy.
A rejected proposal also means the legal protection connected with that proposal does not continue indefinitely. Once the proposal is no longer protecting you, creditors may regain the ability to pursue collection remedies that were stopped by the filing.
Your LIT should explain the timing and consequences in your specific file before you decide what to do next.
If your debts include income tax or other CRA balances, the creditor analysis can require additional care. Caplan’s article on consumer proposals and CRA debt explains how tax debt can fit into formal insolvency options.
Can One Large Creditor Determine the Outcome?
A large creditor can have substantial influence because voting is based on the value of proven claims. If a meeting is called and one creditor controls more than half of the dollar value that votes, its position can effectively determine whether the proposal passes at that meeting.
That does not mean every large creditor will reject a proposal or demand the same repayment percentage. Creditors assess files based on the proposal terms and the financial information available to them.
This is one reason an accurate statement of affairs, realistic household budget and supportable asset values matter. Creditors are being asked to compare the offer with the alternatives. Incomplete or inaccurate information makes that assessment harder and can create problems before a vote.
How Can You Prepare a Proposal Creditors Can Properly Evaluate?
The best starting point is a complete and accurate financial assessment with a Licensed Insolvency Trustee.
Be prepared to provide current information about:
- unsecured debts, including collection accounts and tax debt
- secured debts such as mortgages and vehicle loans
- income from employment and other sources
- regular household expenses
- assets and their realistic values
- joint, co-signed or guaranteed debts
- expected changes to income or expenses that are already known
Do not hide an asset or leave out a creditor because you think it will improve the proposal. Consumer proposals are formal insolvency proceedings, and the information used to prepare them needs to be complete. You are also required to swear a statement under oath disclosing your assets and liabilities.
The OSB’s current guidance also draws a clear distinction between a Licensed Insolvency Trustee and third-party debt advisors. The LIT is responsible for the financial assessment, impartial advice and the administration of the consumer proposal. Only an LIT can file a Consumer Proposal or Bankruptcy. Caplan and Company Ltd. does not charge any fees for their initial consultation.
You should be able to discuss your financial circumstances, available alternatives and the consequences of filing directly with the LIT responsible for your assessment.
What Should You Do If You Are Worried Your Proposal Will Be Rejected?
Do not try to predict what a creditor will accept based on another person’s proposal. Two people with the same amount of debt can receive very different proposal recommendations because their incomes, assets, household costs and creditor mix are different.
The useful question is whether your proposed payment is supported by accurate financial information and gives creditors a reasonable alternative to what they might recover through bankruptcy.
If you are in Manitoba and are considering a proposal, or if you have questions about an offer or counteroffer, a free consultation with a Licensed Insolvency Trustee can help you understand the numbers before you make a decision.
Frequently Asked Questions
Can one creditor reject my entire consumer proposal?
One creditor can have enough voting power to control the result if it holds a large enough share of the proven claims being voted at a creditors’ meeting. The exact impact depends on the value of each proven claim and whether a meeting is called.
What happens if none of my creditors respond to my consumer proposal?
If no meeting of creditors is required within the 45-day review period, the consumer proposal is deemed accepted by the creditors. There is then a further court-review period before the proposal is deemed approved if no review is requested.
Can a creditor ask me to increase my consumer proposal payment?
Yes. A creditor may ask for amended terms, including a higher repayment, before supporting the proposal. You should review any requested change with your LIT to determine whether it is justified by the file and affordable within your real household budget.
Do I have to accept a creditor’s counteroffer?
No. A counteroffer is a request for different terms, not an automatic new agreement. Your LIT can explain the consequences of accepting, negotiating further or allowing the original proposal to be rejected.
Will a rejected consumer proposal automatically make me bankrupt?
No. Rejection of a Division II consumer proposal does not automatically make you bankrupt. You may be able to amend and resubmit the proposal or consider another debt solution after reviewing the options with your LIT.