Filing a Division 1 Proposal can be overwhelming if debts reach out of control levels, but the process doesn’t seem so daunting once you understand how it works. This formal debt restructuring solution is a good way for someone in over their head to deal with obligations owed to multiple creditors. The timeline is structured, and knowing what to expect at each milestone lightens the burden of what is already a difficult financial time.
Understanding the Initial Process
The process begins with an interview with a Licensed Insolvency Trustee who will assess the complete picture. This is not a quick process, so plan on spending some time exploring sources of income, monthly expenditures, what you have that is worth money, as well as a complete list of debts. The Trustee needs to see it all before they can determine whether a Division 1 Proposal is a better option than something else.
Not everyone who goes into this type of proposal qualifies, as the debt levels must exceed $250,000 (excluding a mortgage on the primary residence) which distinguishes it from Consumer Proposals. An assessment will determine if you qualify, and if so, the Trustee will help you compile a proposal that provides an outline of what creditors will receive and how long it will take. Most proposals will contain repayment terms of a few years, but the proposal will be structured around what creditors would consider reasonable.
The Filing and Stay of Proceedings
When the proposal is filed with the Office of the Superintendent of Bankruptcy, there is an immediate effect that halts any collection activity. Garnishments, collection calls, and other legal processes must end, and this stay of proceedings can provide the relief that people need after being plagued by creditors for months or years.
The proposal is sent to all creditors along with a notice of the date of the creditors’ meeting. For people with significant levels of debt, looking into a Division 1 Proposal in Alberta provides an opportunity for restructuring obligations owed to creditors. It allows them to keep their assets and income without having to declare bankruptcy. In the notice document that goes out to creditors, people can expect that they contain information about their financial situation and the proposed payment schedule. Creditors need time to review this before they attend the meeting.
What Happens at the Creditors’ Meeting
The creditors’ meeting takes place within 21 days of filing, but that doesn’t mean a physical meeting in front of an angry boardroom of creditors. Most meetings are done virtually these days and most of the time creditors don’t even bother attending in person. They can vote by proxy, which means they submit their vote via their legal representative ahead of time.
Creditors will vote for or against the proposal based on the dollar amount owed—not by the number of individual creditors. The proposal needs to be passed by at least 50% of creditors representing the dollar amount owed on the proposal. If one creditor represents 60% of the debt, their vote would carry the proposal even if all other creditors voted against it.
What Happens After Creditors Agree to The Proposal
After creditors give their approval to the proposal, it will be presented to the court for final approval. The court needs to be satisfied that the repayment terms are reasonable and fair to both parties. If it is approved (which most often happens when proper care goes into structuring it), it becomes binding on all parties involved.
Now people enter the payment phase of filing a Division 1 proposal. Payments will go to the Trustee according to what is laid out in the proposal schedule. This will usually be set up as a monthly payment that will be distributed to creditors in a manner agreed upon in the contract. Most proposals will require payments for three to five years, but this can be longer or shorter depending on individual circumstances.
Living Under the Proposal
After entering into a Division 1 agreement with creditors, there are more requirements than just paying off what is owed. There are two mandatory credit counselling sessions that must be completed. The purpose is to give people tools to manage their money better in the future so they don’t end up in this position again.
Most proposals have clauses about tax refunds as well that people should be aware of. Tax refunds received while under a Division 1 Proposal are usually required to be turned in to creditors with limited exceptions. This might catch some people off guard who depend on their tax refunds every year.
Most proposals also have clauses related to maintaining life insurance policies with proper named beneficiaries and Trustees do monitor compliance throughout repayment terms. If people fail to comply with requirements after entering into a Division 1 Proposal agreement, their agreement could be annulled.
What Happens If Things Go Wrong During the Proposal
Here’s where things get complicated because life happens and circumstances change over multi-year proposals sometimes. What if people lose their jobs or have medical emergencies? If they miss three payments, the agreement will default which creates complications.
When a proposal has been defaulted, creditors can once again initiate collection action against people who owe them money. This is where negotiation may come into play once more though and it’s possible there may still be room for amending the proposal if it relates to temporary financial hardship.
Completing The Proposal Successfully
Once all payments are made and requirements fulfilled under the proposal, the Trustee will issue a Certificate of Full Performance. After this, there should be no remaining balance on peoples’ debt obligations, which means creditors can tell credit reporting agencies that they have performed their duties and completed their obligations.
The credit reporting agencies are not allowed to keep records of what remains of defaults under Division 1 proposals since debts were formally placed in a legally binding agreement with an insolvency trustee. People may find their files clear with credit reporting agencies despite them holding on to records of consumer proposals for extended periods.
The relief people feel after having successfully completed a Division 1 Proposal cannot be measured; Their years of debt are finally lifted, and they have an opportunity for a fresh start financially. In theory, people should not end up in this kind of position ever again thanks to the mandatory counselling sessions.
Going through each step of this process has ensured that people have realistic expectations about what happens after they file a Division 1 Proposal and also lightened the fear that often comes with formal debt solutions such as this one. Each phase of filing one is structured within timelines that provide stability when someone’s financial life has been chaotic. It is important that people know what to expect after placing formal debt solutions on record with agencies like the Office of the Superintendent of Bankruptcy, so contact does not cause additional stress during already challenging periods in peoples’ lives.