Why Does The Court Have To Approve A Consumer Proposal? (2024)

A consumer proposal is a legal procedure filed under the Bankruptcy and Insolvency Act (BIA) and, as in most cases involving the law, the courts are involved. How involved depends on the situation and what type of proceeding you are filing. In this post, I’ll explain how a consumer proposal is approved by the court and when you may need to attend.

Table of Contents

Does a consumer proposal get filed with the court?

While all proposals are approved by the court, filing paperwork with the court is not automatic and is not always required.

The BIA provides two types of proposals for Canadians to eliminate debt: a Division I proposal and a Division II proposal, commonly known as a consumer proposal.

A Division I proposal is a more complex process used by individuals when the total debts involved (excluding a mortgage on a principal residence) exceed $250,000. Under the BIA rules, the court is involved in a Division I proposal automatically and the terms of a Division I proposal must be filed with the court and approved by the court as well as the creditors.

A consumer proposal was designed to be a simpler debt solution for individuals with debts of $250,000 or below, excluding a mortgage on a principal residence. As a result, the courts are only involved in a consumer proposal if needed, specifically when a request has been made for the court to be involved by the creditors, the licensed insolvency trustee or the official receiver.

When is the consumer proposal approved?

If consumer proposal documents are not automatically filed with the court, how is the deal approved by the court?

There are actually two approvals that are required in the proposal process, firstly from the unsecured creditors and secondly from the court.

Creditor approval

Once your consumer proposal is filed, the creditors have 45 days to vote. The proposal has to be accepted by the majority of creditors in dollar value. A creditor gets one vote for each dollar it is owed. The proposal can be deemed approved if the creditors don’t ask for a meeting of creditors, or approved at a meeting of creditors.

Creditors can also vote against or reject a consumer proposal, although this is rare. Consumer proposals are usually accepted as filed and negotiations can take place between you and your creditors with the help of your Licensed Insolvency Trustee to gain a positive vote. At Hoyes, Michalos 99% of the proposals we file on behalf of our clients are accepted.

Court approval

Once a consumer proposal is (deemed) approved by the creditors, there is a 15-day waiting period to allow an interested party or the Office of the Superintendent of Bankruptcy to request the court to review the proposal. The consumer proposal is deemed to be court-approved on the expiration of the 15th day if no one has asked the court to review it.

An interested party or the Office of the Superintendent of Bankruptcy (OSB) can request the court to review the proposal before it is deemed court approved. This does not happen often. Some examples of why a court would be requested to review the proposal would be if an interested party (a creditor, LIT or Official Receiver on behalf of the OSB) is aware that there are errors of omission in the documents or if they believe the terms are not appropriate or fair.

If the proposal is reviewed and approved by the court, it is court-approved the day the court hears the matter and makes its order.

Will I have to go to court?

As most consumer proposals are deemed-approved, a court hearing is usually not necessary. However, if a hearing is requested you may need to attend. Your trustee will appear in court to answer any questions but the court may have questions for you directly.

With the courts increasing their usage of video, courts are now more insistent that people attend court. It is also advisable for you to attend court as you will want to ensure you provide the court with any necessary information about your financial situation to ensure your proposal is approved so you can clear your debts.

The court will hear from the Licensed Insolvency Trustee, you, the consumer debtor, and any interested party. If the court determines that the terms are fair and reasonable and there is no evidence of wrongdoing on your part, it will approve the proposal.

If the situation is complicated, you may wish to retain independent legal counsel. Your LIT is the Administrator of the Consumer Proposal and an officer of the court and as such must present the proposal and cannot advocate on your behalf.

What court is involved

If the court is required to adjudicate a matter, the process begins with the provincial or territorial court where the proposal is filed. For example, for a consumer proposal filed in the Province of Ontario, the Superior Court of Justice hears personal bankruptcy or proposal matters.

The Courts of Appeal can hear appeals related to insolvency matters. And finally, as the highest court, the Supreme Court of Canada has jurisdiction to hear and decide matters brought before it.

For the approval of a proposal, it will be heard by a Superior Court justice.

Can the court reject a consumer proposal? Why would a judge reject a proposal?

Yes,a court can reject a consumer proposal, even one that has been accepted by the creditors.

The court can reject a consumer proposal if:

  • there are technical or legal reasons why the proposal should not have been filed in the first place, or
  • the court determines that the terms of the consumer proposal are not reasonable or fair to the consumer debtor and the creditors, or
  • you, as the debtor, have committed an offence under the Bankruptcy and Insolvency Act.

For example, you cannot file a new consumer proposal if you still have debts owing from a previous failed proposal. If you filed bankruptcy to eliminate those old debts and have received your bankruptcy discharge for those debts, you can file another proposal on new debt you have incurred but cannot file a proposal for old debts under a previous proposal.

Again, this only happens if a court hearing is requested. If no request is made within 15 days of a deemed approval by your creditors, the proposal is automatically deemed approved by the court.

What does court approval mean?

Court approval means that the court has ensured that the requirements set forth in the Bankruptcy and Insolvency Act have been adhered to.

Once the consumer proposal is (deemed) approved by the court, it is a set contract. It cannot be changed without going through an amendment process and it cannot be stopped unless you stop paying for it or an interested party asks the court to annul it. An annulment by the court is rare. If you stop a consumer proposal after it has been court approved, you cannot file another consumer proposal on the same debt unless you first receive court approval.

Before court approval, you can withdraw your proposal and then file another proposal on the same debt at a later date. Why would you do that? Well, for instance, if you thought it had been more than 7 years since you stopped being a student but learned that it was actually only 6 years and 9 months, you can withdraw the proposal and refile it after the 7-year mark. We do encourage everyone who has student loan debt to call Canada Student Loans to ensure their end of study debt.

Creditor approval vs. court approval

Creditor approval is the first approval required for your proposal to move forward. A consumer proposal is an offer to your creditors to settle your debts, therefore the creditors have the right to agree or disagree with your offer. Creditors are agreeing to the terms as you set them out or they negotiate for an offer that they would find acceptable. Court approval is the court approving that the proposal has met the requirements of the Bankruptcy and Insolvency Act. An LIT is required to ensure your proposal follows the BIA requirements. If a proposal is deemed court accepted and an interested party notices that the requirements are not met, that party can request that the court annul the proposal on those grounds. The court and/or Superintendent of Bankruptcy would review the LIT’s actions if the LIT failed to include the basic requirements of a consumer proposal.

When else might the courts be involved in my consumer proposal?

The court can be involved in the approval process but it can also be involved during the proposal.

Any interested party or the Office of the Superintendent of Bankruptcy can request the court look at the proposal at any time.

For example, there are certain rights limited under the Bankruptcy and Insolvency Act, such as a secured creditor cannot change the terms of a loan agreement solely because a consumer proposal has been filed. The court can declare that this section does not apply or applies in a limited capacity if it can be proved that the creditor will be caused significant financial hardship because of that section. However, this is very rare.

Two more common reasons when the court is involved during a proposal are:

  • a proposal is being annulled, or
  • you are asking for an annulled consumer proposal to be revived.

A proposal is deemed annulled when 3 monthly payments have been missed, or 3 months have passed since your payment was required to be made if you don’t pay monthly. This happens automatically without the court. However, the court can annul a proposal when there has been a default made in the performance of any term of the proposal, where it appears to the court that the debtor was not eligible to make a consumer proposal, where the court feels the proposal cannot continue without injustice or undue delay, or that the approval of the court was obtained by fraud. The court can also annul a proposal if the consumer debtor was convicted of an offence under the Bankruptcy and Insolvency Act.

If a proposal is deemed annulled because you’ve missed three payments, talk with your Licensed Insolvency Trustee. If the timeframe has passed for an automatic revival to occur, your LIT may apply to court to revive the proposal as long as you weren’t bankrupt when you filed your proposal and as long as your LIT considers it appropriate to do so. The court will then review the matter and if it determines that a revival is appropriate, it will make an order to that effect.

What is the consumer proposal application process?

To file a consumer proposal you need to meet with a Licensed Insolvency Trustee (LIT) for a free consultation. You and your LIT will review your financial situation and make sure a consumer proposal is your best debt relief option to deal with your debts. They will review your budget to help you make an offer which is affordable to you and likely to be accepted by your creditors. Terms of the proposal can include a lump sum payment or monthly or periodic payments over a period of time of no more than five years.

Your LIT will gather information from you, prepare your documents, and meet with you to sign them. The LIT will then file these documents with the government and send a copy to your creditors.

As noted previously, your creditors vote to accept or reject your proposal. Your LIT will count the votes and notify you of the result.

In addition to making your required payments, you will be required to attend two credit counselling sessions.

Most people file a consumer proposal to deal with financial difficulties that make repayment of credit card debts, payday loans and other unsecured debts impossible to repay in full on their own. A consumer proposal is an alternative to a debt consolidation loan. Proposal payments are more affordable and are interest-free. Depending on your credit rating, the interest rate on a consolidation loan can be prohibitively expensive. We have seen people charged as high as 59% for unsecured consolidation loans, only to file a consumer proposal after these types of options fail.

A consumer proposal provides a stay of proceeding which can stop wage garnishments.

A proposal does not deal with secured debts like a mortgage or car loan, although it is possible to surrender a vehicle under a loan or lease that you cannot afford and include any shortfall in your proposal.

Upon completion of your proposal, you will receive a certificate of full performance which relieves you of any future obligation to repay the unsecured debts included in your proposal. You are now debt-free.

Similar Posts:

  1. Can You Cancel a Consumer Proposal?
  2. Consumer Proposal Vs. Division I Proposal to Creditors
  3. What Happens If My Creditors Reject My Consumer Proposal?
  4. Can You File A Consumer Proposal Twice?
  5. When is a Consumer Proposal Legally Binding on your Creditors?
Why Does The Court Have To Approve A Consumer Proposal? (2024)


Why Does The Court Have To Approve A Consumer Proposal? ›

While creditor approval is the first step for your proposal to advance, court approval ensures that the proposal has met the requirements of the Bankruptcy and Insolvency Act.

Why would a consumer proposal be rejected? ›

Consumer Proposal Rejected Due to Debtor Conduct

Here are some examples: You brought on, or contributed to your financial situation by rash and hazardous speculations, unjustifiable extravagance in living, gambling or by culpable neglect of your business affairs.

What percentage of consumer proposals are accepted? ›

When a proposal passes, it forces all general unsecured creditors(with minor exceptions)to settle their claims against the debtor for the amount offered in the proposal. Consumer proposals get accepted in our office “eventually” at a rate of 95% or better.

Do creditors have to accept a consumer proposal? ›

Creditor approval

Once your consumer proposal is filed, the creditors have 45 days to vote. The proposal has to be accepted by the majority of creditors in dollar value. A creditor gets one vote for each dollar it is owed.

How long does it take for a consumer proposal to be approved? ›

45 days after the proposal is filed the Administrator will review all the claims filed by your creditors and their voting letters. If a majority of the dollars owed vote in favour of the proposal, it is considered accepted and all unsecured creditors are bound by it (some minor exceptions apply).

How often do consumer proposals get denied? ›

Consumer proposals are rarely rejected; however, if your creditors do reject your consumer proposal, all hope is not lost. When you file a consumer proposal, your creditors have 45 days to submit votes on your proposal.

What happens when a consumer proposal fails? ›

In our experience what happens when a consumer proposal fails is the majority of creditors will vote against the proposal and the trustee will approach the debtor and ask them to accept the counter offer or allow the proposal to be rejected by the creditors.

What is the catch of a consumer proposal? ›

Paying off debt with a consumer proposal will negatively affect your credit. You will get out of the unsecured debt you owe in 60 payments or less. The agreement is legally binding, so if you break it you will not receive a refund on the fees that you paid.

Do you have to give up all credit cards in consumer proposal? ›

When you file for a consumer proposal, you will have to hand in any credit cards that are part of the proposal. The creditors will freeze or close the credit card for which you previously qualified. You might have a credit card with a zero balance or a credit balance not included in the proposal.

What are the disadvantages of consumer proposal? ›

Cons of a Consumer Proposal
  • If the majority of your creditors vote against the Proposal, you may have to file for Bankruptcy.
  • It typically takes four to five years to repay a Consumer Proposal, which is longer than a typical Bankruptcy.
  • Your payments are fixed.

Can you keep your house with a consumer proposal? ›

The news might be better than you thought. One of the primary advantages of a consumer proposal is that you can keep your assets while reducing your debts by up to 80%. Unlike bankruptcy, consumer proposals allow you to keep assets including your home, car, tax refunds, and RRSPs.

What happens after a consumer proposal is accepted? ›

Once you have completed the terms offered to your creditors under your Consumer Proposal you will receive a Certificate of Full Performance, which officially releases you from your obligation to repay the remaining balance of your debts settled in your Consumer Proposal.

Can my consumer proposal be denied? ›

If a majority of your creditors feel that your consumer proposal is not reasonable, they may reject it and you will have to consider other options such as filing for bankruptcy. If you are making a Division I proposal, yes, it can be refused.

Who pays for a consumer proposal? ›

In simple terms: You do not need to pay what you are offering to your creditors plus a fee – everything is included in one simple monthly payment. Generally if you are making a Consumer Proposal, you will only pay your first monthly proposal payment when you sign the official Consumer Proposal documents.

What is the fastest way to build credit after a consumer proposal? ›

7 Tips to Rebuilding Credit Following a Consumer Proposal
  1. Monitor your Credit Report.
  2. Make On-Time Payments.
  3. Apply for a Secured Credit Card.
  4. Take Out an RRSP.
  5. Use a Credit Building Program.
  6. Set a Budget.
  7. Develop Healthy Credit Habits.
  8. Beware of Credit Repair Scams.
Feb 16, 2022

How many payments can you miss in a consumer proposal? ›

If you miss more than three (3) payments, the consumer proposal collapses and annulled by the court. Your creditors can immediately apply to the court to have your wages garnished and interest charges are applied to your debts all the way back from the day you filed.

Are consumer proposals always accepted? ›

As you put together your consumer proposal, however, you will want to design it in such a way that your creditors will accept it. For a consumer proposal to be accepted, 51% of your creditors must agree to it, so creating an acceptable proposal is absolutely crucial.

Are most consumer proposals accepted? ›

Consumer Proposals Have a 98% Acceptance Rate: We made the statement in this article that almost all consumer proposals are accepted because the creditors know they will get more money with the consumer proposal than if the debtor goes bankrupt. In many cases the creditors will get nothing in a bankruptcy.

How long does a failed consumer proposal stay on a credit report? ›

Equifax and TransUnion remove a consumer proposal from your credit report either: 3 years after you pay off all the debts included in the proposal, or. 6 years after you sign the proposal (whichever is sooner)

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