Can a Consumer Proposal Be Rejected by Creditors in Canada?

A Consumer Proposal is one of the most powerful debt relief tools in Canada, allowing you to settle your unsecured debts for a fraction of what you owe without filing for bankruptcy. Because this process is legally binding on all your creditors, they are given a democratic right to vote on whether they accept your settlement offer. It is natural to feel anxious about the possibility of rejection, but understanding the voting mechanics and your alternative options can help you navigate the process with confidence.

Creditors do not reject proposals out of spite; they base their decisions on financial recovery. If they believe you have the income or assets to pay a higher dividend, they may push back. Fortunately, a rejection is rarely the end of the road. Your Licensed Insolvency Trustee (LIT) acts as an intermediary to help find a middle ground that satisfies both you and your lenders.

The Voting Process and Thresholds in Canada

Unlike standard debt consolidation loans, a consumer proposal operates under the federal Bankruptcy and Insolvency Act. This means the rules are identical whether you file in Ottawa, Mississauga, Calgary, or Winnipeg. The most critical rule is the voting threshold: acceptance requires a simple majority in dollar value.

If you owe a total of $50,000, creditors representing at least $25,001 of that debt must vote “Yes” for the proposal to pass. This structure gives significant power to your largest creditors. If the Canada Revenue Agency (CRA) or a major bank holds 60% of your total debt, they essentially have a veto over the entire process.

Step 1: Filing the Proposal and Pausing Collections

Once you and your LIT draft and sign the proposal, it is officially filed with the Office of the Superintendent of Bankruptcy (OSB). Immediately, a legally binding “stay of proceedings” goes into effect across Canada. This stops all wage garnishments, harassing phone calls, and legal actions from your creditors.

Step 2: The 45-Day Voting Window

After filing, your creditors are given exactly 45 days to review the proposal, submit their Proof of Claim, and register their vote. Many smaller creditors will not bother to vote. If a creditor does not vote, they are legally assumed to have accepted the proposal. Your LIT will monitor the incoming voting letters and keep you updated on the tally.

Step 3: A Meeting of Creditors (If Requested)

If creditors holding at least 25% of the dollar value of your debt request a meeting, the 45-day automatic approval is halted, and a Meeting of Creditors is scheduled. This is not a courtroom trial; it is usually a phone call or virtual meeting facilitated by your LIT. This meeting is where the real negotiations happen. The opposing creditors will explain why they rejected the initial offer and state what terms they would be willing to accept.

Step 4: Amending the Proposal

During or before the creditors’ meeting, you have the right to offer an amended proposal. For example, if you originally offered to pay $300 a month for 60 months, a bank might demand $400 a month. You and your LIT will review your budget to see if this is feasible. If you agree to the amendment, the creditors will change their vote to “Yes,” and the proposal moves forward.

Step 5: Final Court Approval

Once the creditors accept the proposal (either the original or amended version), there is a mandatory 15-day waiting period. During this time, the OSB or any dissenting creditor can ask the provincial court (such as the Supreme Court in British Columbia or the Cour supérieure in Quebec) to review the file. If no one objects, the proposal is deemed court-approved, and you simply need to complete your payments.

What Are Your Options if the Proposal is Ultimately Rejected?

If you cannot reach an agreement with your creditors and the proposal is officially rejected, the stay of proceedings is lifted. Creditors regain the right to sue you or garnish your wages. However, you still have options:

• File for Bankruptcy: This is the most common next step. Because you likely already lack the funds to pay your debts in full, declaring personal bankruptcy offers a fast track to a fresh start, and creditors cannot vote to reject a bankruptcy filing.
• Debt Management Program (DMP): If your debts are primarily credit cards, a non-profit credit counsellor might help you set up a DMP. This requires paying 100% of the principal debt, but often reduces the interest rate to zero.
• Informal Settlement: You can attempt to negotiate directly with creditors, though this lacks the legal protection of a formal proposal.

How Much Does it Cost if a Proposal is Rejected?

One of the benefits of working with an LIT is that their fees for a consumer proposal are baked into your monthly proposal payments. 💰 If your proposal is rejected before it is approved, you generally do not owe the LIT any ongoing proposal fees. However, if you choose to pivot and file for bankruptcy, you will need to pay the standard base fees for bankruptcy administration, which typically start around $1,800 CAD in most provinces.

How Long Does the Negotiation Take?

The initial voting window is strictly 45 days. If a meeting of creditors is called, it must be held within 21 days of the request. Therefore, you will generally know the final outcome of your consumer proposal-whether accepted, amended, or rejected-within approximately two months of your filing date.

Frequently Asked Questions (FAQ)

Author: lawyerinfo.ca