Alternatives to Consumer and Farm Bankruptcy

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 515-532

515

CHA PTER 20

ALTERNATIVES

TO CONSUMER AND

FARM BANKRUPTCY

This chapter covers three different insolvency regimes. The consumer

proposal provisions and the orderly payment of debts provisions of the

BIA both deal with consumer debtors. The Farm Debt Mediation Act1

covers far mers. All of them operate as alternatives to bankruptcy. By

invoking these regimes, the consumer or farm debtor will avoid a bank-

ruptcy and will be entitled to keep his or her asset s.

The consumer proposal provisions permit a consumer to make a

proposal to his or her creditors. The provisions differ from the commer-

cial proposal under the BI A in that the process i s quicker and simpler

and the voting rules make it easier for the debtor to obtain the approval

of the creditors. The orderly pay ment of debts provisions, which oper-

ate in only four of the provinces, do not require the approval of credit-

ors. They merely create a process through which the various debts of

the consumer debtor may be consolidated into a single sum. The farm

debt mediation statute provides a proce ss t hrough which a voluntary

arrangement can be concluded between a farmer and his or her credit-

ors. Unlike commercial restructuring proceedings, there is no mechan-

ism to bind a dissenting creditor.

1 S.C. 1997, c. 21 [FDMA].

BANKR UPTCY A ND INSOLVENCY L AW516

A. CONSUMER PROPOSALS

A cons umer propos al differs from a con sumer bankruptcy in several

respects. First, the property of the debtor does not vest in an insolvency

administrator. A consumer debtor may consider a consumer proposal

to be a better option since the debtor i s able to keep his or her house,

vehicle, and other property. Payment s to the creditors are generally

made from t he future i ncome or other earnings of the debtor over the

course of the consumer proposal. A consumer may also choose a con-

sumer proposal to avoid the stigma of bankruptcy or in the hope of pro-

curing a more favourable credit history. Second, the insolvency process

does not involve a liquidation of the debtor’s assets. Instead, the process

involves the preparation of a proposal and its acceptance or rejection

through a vote of the creditors. The proposal binds creditors even if

they have voted against it, so long as a majority of the creditors have

approved of it. The voting rules are heavily skewed towards obta ining

approval of a consumer proposal, since silence is taken as consent to

the proposal.2

The choice bet ween making a consumer proposal and ma king an

assignment in bankruptcy is generally done in consultation with a

trustee, since both ban kruptcies and consumer proposal s requi re the

services of a licen sed trustee. However, the BIA attempts to dissuade

debtors from choosing bankruptcy if a consumer proposa l is a viable

option. A court i s not permitted to grant an absolute discharge if t he

bankrupt could have made a viable proposal but chose to proceed to

bankruptcy as the means to resolve the indebtedness.3

1) Eligibility

A consumer proposal is a voluntary process that can be initi ated only

by a debtor.4 In order to be eligible to ma ke a consumer proposal,

the debtor must fall within t he Div ision II def‌inition of a “consumer

debtor.”5 To qualify as a consumer debtor, the debtor must:

2 Registr ar Nettie in Re Sztojka, 2005 Carswe llOnt 7449 at para. 2 (S.C.J.) ob-

served th at the consumer proposals prov isions are “drafted in such a m anner as

to favour creditor apat hy, and result in deem ed creditor acceptance and deeme d

Court approval in t he vast majority of proposal s f‌iled under Division II.”

3 Bankruptcy an d Insolvency Act, R.S.C. 1985, c. B-3, ss. 172(2) and 173(1)(n) [BIA].

A mediation proce ss is used to resolve thi s question if it is the only groun ds for

objection to the di scharge. See BIA, ss .170.1(1) –(2 ).

4 Ibid., s. 66.12(1).

5 Ibid., s. 66.11(1) “consumer debtor.”