A Personal Proposal Story
“A Personal Proposal Story” is one of the chapters in our book The Personal Insolvency Guide. This book is available for FREE at this link.
Peter was worried sick. He felt like a failure. He had always been supremely confident and felt he could accomplish almost anything he set his mind to. Now he had grave doubts. He was a failure, he thought, at 27 years of age!
Peter had started a business a few years ago. The business supplied and installed customized audio systems in vehicles. There was excellent demand in this niche market and the business thrived. Peter had opened a second location in a town about 100 kilometres away and his best friend was managing this location.
Then things started to go wrong. The second location was not doing well and sales were poor. Peter had spent the whole weekend going over the books and it was a disaster! Not only were the sales low but also he found out that extending credit made up a large part of the sales. He knew a large percentage of the debt was not collectable.
He had made it clear to his friend that under no circumstance was he to extend credit. It was cash up front or payment by credit card.
“Why did you do this?” he asked his friend.
The friend was contrite. “I am sorry, Peter. What can I say? I thought I was doing the right thing.”
Peter knew the business could not survive. He went to the bank and they immediately appointed a receiver. In time, the bank was paid out from the proceeds from the inventory and the collection of accounts receivable. So was Canada Revenue Agency (CRA).
When the dust settled, Peter found he was personally liable for the business debt he had personally guaranteed. There was also his personal debt to contend with, made up of credit card debt of $5,000 and income tax owing of $5,000. In total he owed $80,000.
Peter went to see his father, a successful businessman. Peter’s father listened to Peter’s story. He didn’t criticize Peter and didn’t say, “I told you so.” Instead, he asked a few questions about the debt and said that Peter had to get professional advice as soon as possible. Peter’s father said he knew a trustee in bankruptcy and did Peter want him to set up an appointment? Peter said he did.
“Do you want me there too?” asked Peter’s father.
“I do,” replied Peter.
Peter and his father were now meeting with the trustee. The trustee had reviewed Peter’s financial information and had asked a number of questions. One question concerned Peter’s current income.
Peter said he was working as a salesman in an audio store and was making about $1,800 a month, take-home pay.
The trustee said he could only see two options for Peter. One was bankruptcy, which would see all the debt erased, including the CRA debt, and would see Peter discharged in nine months.
“What is the second option”, asked Peter.
“It’s a proposal,” the trustee replied. “But since you do not have an income sufficient to make payments on a proposal it would have to be a “Lump sum” proposal with funds put up by a third party.”
The trustee explained that if Peter earned enough to pay say $20,000 over 40 months, he thought that would be acceptable to the creditors and Peter could file a proposal, thus avoiding bankruptcy.
Peter’s father said he would like to know more about this and said he might be prepared to put up the money.
The trustee explained that there were two types of proposal available; a consumer proposal and a division I proposal (see Page 83). There was some discussion on the major differences between the two:
The trustee said that the consumer proposal was deemed to be accepted after 45 days if creditors do not call for a creditors’ meeting and fewer than 50% of the dollars are voted against the proposal. Also if the proposal was not accepted you would not be automatically bankruptcy but the stay of proceeding, protecting you from your creditors would be dropped.
The trustee explained that in a division I proposal at least 66.6 percent (2/3) in dollars and 50% plus one in number of eligible creditors who vote must approve; The results of the vote would be known in 21 days and if the proposal was not accepted then Peter would be bankrupt.
The trustee explained that the terms of a proposal were only limited by imagination and the following rules:
Creditors had to be better off than in a bankruptcy;
Creditors have to approve the proposal or have it deemed to be approved by them not voting 50.0+ % of the dollars against a consumer proposal;
The proposal had to be approved by the court or in the case of a consumer proposal have it deemed to be court approved.
The trustee explained that the creditors who voted would bind all unsecured creditors to the proposal, even the creditors who did not vote and those who voted against the proposal. He further explained that if the creditors did not accept the Division I Proposal, then Peter would be bankrupt effective the date of the creditors’ meeting, at which votes were cast.
Peter’s father asked the trustee what the advantages were of the proposal compared with a bankruptcy.
The trustee said that the bankruptcy was cheaper and would only cost about $1,800. The fact of a bankruptcy would be erased from the credit bureau report 6 years after the discharge from bankruptcy or about 7 years after an assignment into bankruptcy.
The advantages of a proposal were that the credit bureau record would be erased 3 years after the proposal terms were satisfied or about 40 months after the proposal was filed.
There was another possible advantage, the trustee stated but it would depend on a value judgement by Peter as to whether it really was an advantage. That was that a proposal was not a bankruptcy.
The trustee asked Peter if it was important to Peter not to go bankrupt. Peter said it was.
Peter’s father asked the trustee how much the lump sum should be. The trustee said it was up to Peter and his father to come up with the dollar amount. The trustee informed them that if the creditors accepted the proposal they would be paid the proposal amount in approximately three months.
Peter and his father conferred for a few minutes and then Peter’s father told the trustee that he was prepared to put up $16,000.
Peter told the trustee that he would like to file a Division I Proposal rather than a Consumer Proposal because he wanted to know the result as soon as possible. i.e. in 21 days and did not want to wait 45 plus days. He also said that he liked the idea of immediately going into bankruptcy if the creditors did not accept the proposal.
Peter explained that this perhaps would encourage the creditors to vote for the proposal since the alternative was they would get nothing if he went into bankruptcy. He also said that if the creditors did not accept the proposal he would have to file bankruptcy in any case so why not have it happen immediately.
Peter also felt that maintaining the continuity of the stay of proceeding was important to him. He explained that since in a consumer proposal the stay of proceeding was dropped if the creditors did not accept the proposal this made him vulnerable to having his wages garnisheed.
He asked the trustee if he thought that would work. He also asked the trustee how he would be paid.
The trustee said he felt that that amount would be acceptable. He said his fees would be about $4,000 and would come out of the $16,000.
The trustee said he would draft the proposal and have it ready to sign in two days. He said he would need a bank draft from Peter’s father in the amount of $16,000 at that time. He explained that he and Peter’s father would sign an agreement that the $16,000 would be returned to Peter’s father if the creditors did not accept the proposal, or the court did not approve it.
The trustee also reminded them that the creditors’ meeting would vote on the proposal 21 days after the proposal was filed and if the proposal was not accepted that Peter would be bankrupt effective that date. The trustee said that Peter was required to attend the meeting and that he thought Peter’s father should also attend.
Peter and his father said they understood and made an appointment for Peter to attend at the trustee’s office in two days to sign the proposal and associated documents. Peter’s father said he would have the funds in the hands of the trustee the next day.
Peter and his father were now at the trustee’s office at the creditors’ meeting. There were three creditors in attendance, including a representative from CRA. The trustee had checked the Proofs of Claim that the attending creditors had provided.
The trustee chaired the meeting. He reviewed the report he had sent to all the creditors giving the background and the terms of the proposal. He also reminded the creditors that he was recommending that the proposal be accepted since the creditors in the proposal would get about $12,000 or 15 cents on the dollar. While, if they voted against the proposal and Peter was placed into bankruptcy they would get nothing.
The trustee said that the purpose of the meeting was to consider and vote on the proposal. The trustee told the meeting that he had three voting letters voting in favour of the proposal. The trustee asked if there were any questions.
The creditors asked a number of questions of Peter concerning how the business failed.
The representative of CRA informed the meeting that she would be voting against the proposal unless CRA received 100 cents on the dollar of the $5,000.00 CRA debt.
Peter and his father conferred for a few minutes.
Peter informed the meeting that he was prepared to go into bankruptcy if the creditors did not accept the proposal. Peter’s father said that he was not prepared to put up any more money.
The trustee called for voting letters to be filled out by the three creditors present.
The trustee took a few minutes to tally the votes and then announced that the creditors had accepted the proposal as follows:
Five votes were in favour of the proposal in the amount of $30,000 and one vote was against in the amount of $5,000.
The trustee said he would immediately make an application to court to have the proposal approved by the court. He informed the creditors he would notify the creditors of the court date.
The court did approve the proposal. Later the trustee paid out the required monies to the creditors and issued Peter a Certificate of Completion as evidence of the successful completion of the proposal and erasing of his unsecured debt.
This proposal story illustrates some of the most powerful features of a proposal:
Creditors representing only $35,000 of the $80,000 in debt voted to accept the proposal but ALL the creditors are bound by the terms of the proposal.
CRA (Canada Revenue Agency) voted against acceptance of the proposal but they too are forced to accept the terms of the proposal.
A third party (the father) funded the proposal with the funds he advanced to be refunded to him if the creditors did not approve the proposal. This is a fairly common occurrence and provides a very persuasive motive for the creditors to accept the proposal. i.e. The creditors will get $12,000 if they accept the proposal and nothing if they refuse to accept it.