Bankruptcy – There are Alternatives

Although the Canadian economy has been in a growth stage for a considerable length of time, and notwithstanding the significant fall in the unemployment rate, bankruptcies continue at near record levels. Sadly, in many circumstances, individuals and businesses alike can avoid bankruptcy.

Very often, a viable alternative to bankruptcy is a Proposal. A Proposal is an agreement between a person (or a business) and his creditors, whereby the debtor agrees to pay only a portion of the debt owing, thereby avoiding bankruptcy.

A Proposal is made to the creditors through a trustee-in-bankruptcy, and is subject to Court approval. A Proposal must receive approval by at least two-thirds in dollars and a majority of eligible creditors who vote at the creditors’ meeting. Once approved by the creditors, it must then receive Court approval. Once approved, all unsecured creditors are bound by the Proposal, not just the creditors who voted in favor. If the Proposal is not accepted, the debtor is bankrupt.

The filing of the Proposal creates potentially a “win-win” situation for both the debtor and the creditors. Proposals are typically a better deal for the creditors than bankruptcy, as the creditors see a higher level of recovery. Conversely, a Proposal is a better deal for a debtor in that he is able to avoid bankruptcy.

For the individual debtor, there is also the possibility of filing what is called a “Consumer Proposal”. To be eligible, a person must not have total debt in excess of $75,000.00, excluding debt secured by a principal residence. The attractive feature of a Consumer Proposal is that if the creditors do not accept the Proposal, then the debtor is not automatically bankrupt. Other than the professional costs to be incurred, there is really no downside whatsoever for the debtor in filing a Consumer Proposal.

Debtors should seek professional advice at as early a stage as possible. Procrastination rarely serves the interests of either the debtor or his creditors. Although not for everyone, a Proposal may well save the day, for both the debtor and the creditors.