Understanding Proposals
A Proposal is an option for dealing with financial difficulties when you have the ability to make payments on your debt but cannot pay every creditor the amount due or being requested.
- A Proposal is typically made to unsecured creditors, who form one class under the Proposal.
- A Proposal provides for an extension of time for repayment or a reduction in debt, or both.
- A Proposal provides protection from collection proceedings by creditors (subject to certain exceptions), with the ability to "bind" smaller, dissenting creditors.
- Certain debts, such as outstanding family maintenance debts, student loans incurred within 7 years prior to filing, and debts incurred by fraud, cannot be discharged in a Proposal without the express consent of the affected creditor.
- A Proposal affects the credit rating for a period of time after completion.
There are no rules as to how much you must offer your unsecured creditors in the Proposal, however a Proposal must offer the unsecured creditors more than what would be received in a bankruptcy. Depending on your personal situation this may mean that the Proposal offers repayment of only a portion of your unsecured debt with interest on the debt stopping on the day that the Proposal is filed. In other cases the Proposal may offer repayment over an extended period of time of all of the unsecured debt with some amount of interest.
Filing of a Proposal stops ("Stays") creditors from being able to take or continue legal action against you without permission from the Court and also stops wage garnishments (except for alimony and support).
Secured creditors (creditors which hold any of your assets as security for repayment of their loans - i.e. car loans) are not bound by a Proposal unless they choose to be and a secured creditor is only likely to make that choice where the terms of the Proposal include making their regular payments on time during the term of the Proposal.
A Trustee will assist you to develop a Proposal that you will be able to meet and which should be acceptable to your unsecured creditors.
What is the difference between a Proposal and Credit Counselling?
Although many people are more familiar with the concept of credit counseling, debt management plans administered by credit counseling companies are effectively informal proposals. Only a Trustee in Bankruptcy can administer a formal Proposal to creditors and provide you with protection from your creditors during the Proposal. The following chart illustrates the differences between a Proposal and credit counseling.
| Proposal | Credit Counselling |
|---|---|
| can only be filed through a Trustee, who is highly trained and licensed | anyone can be a "credit counsellor" - no special training is required |
| provides legal protection from creditors | no protection from creditors |
| binds all unsecured creditors | participation by creditors is voluntary |
| interest stops upon filing | interest accrues, often at a reduced rate |
| debt can be compromised or settled in a proposal | debt must be paid in full |
| fees are set by law | fees are discretionary |