An individual or a corporation with debts exceeding $250,000 has the option of submitting a Division 1 proposal between the individual, or the company, and the unsecured creditors. The proposal is simply an agreement between the individual, or the company’s, and their unsecured creditors whereby there is an agreement for the individual or the company to pay only a portion of the outstanding debts (Example: 50%), thus avoiding bankruptcy. A proposal is made to the unsecured creditors through a licensed insolvency trustee lawyer.
If the unsecured creditors accept the proposal, based on the voting at the meeting of creditors as described below, and the court then approves it, the proposal is a binding contract which all unsecured creditors must accept, including the creditors who did not vote for the proposal. If the unsecured creditors decide to vote against the proposal then the person or company is automatically bankrupt.
Proposals are particularly useful in the following situations:
A proposal is a contract between a debtor and his creditors. It settles the creditors' rights, if there are differences in priorities or treatment amongst them. It becomes a binding contract, to the extent of the aforementioned priorities and treatments, amongst the creditors themselves. They enter into the contract by voting on it and either "assenting to it or defeating it."
Creditors vote on the proposal in person or by mail at a creditors' meeting, held approximately three weeks after the proposal is filed. The trustee must file a report to the creditors on the affairs of the debtor and causes of the financial difficulties.
The trustee must also present to the creditors his estimate of what the creditors would realize under a bankruptcy, as compared with the amount they are being offered under the proposal. In order for the proposal to be justified, the creditors must be better off under the proposal than they would be under a bankruptcy.
The proposal must receive approval by at least 66.6% (2/3) in dollars, and 50% plus one in number of eligible creditors who vote, and the proposal must be approved by the court. If the proposal is accepted by the creditors and approved by the court then all unsecured creditors are bound by the proposal, not just the creditors who voted in favor of the proposal.
If the proposal does not receive the required votes, the debtor is immediately bankrupt effective the date of the creditors' meeting.
When filing your proposal, make sure to factor in these key considerations: