For many people, a consumer proposal is an effective option for settling debts when you are simply unable to repay everything in full. Consumer proposals have grown significantly in popularity in recent years as more people become aware of consumer proposals as a viable alternative to bankruptcy in Canada. Even with this popularity however, there is still a lot of confusion and misinformation.
What Is A Consumer Proposal?
A consumer proposal is a means through which you can legally offer a payment arrangement with your creditors to settle your debt for less than you owe. It can only be filed with a Trustee in Bankruptcy who acts as the consumer proposal administrator.
Consumer Proposal Settles Unsecured Debts
A consumer proposal can only settle unsecured debts. A consumer proposal does not deal with secured debts. The most common examples of secured debts are mortgages and car loans. If you default on your car or mortgage payments, the secured creditor has the right to repossess the asset.
An unsecured creditor has no rights to your assets without a court order. The most common example is a credit card. Lines of credit are often unsecured, but are sometimes secured to a house. Income taxes are also unsecured, unless the Canada Revenue Agency has proceeded to register a lien against your house or other assets.
As long as the money you owe is an unsecured debt, it is included in a consumer proposal and you can make a deal to settle those debts.
Proposal Cannot Settle Secured Debts
A consumer proposal cannot be used as a means to lower the amount owing on your house or car since those are secured debts. If you want to keep the house or car, you are required to continue the payments based on the agreement already in place.
Many people find that dealing with their unsecured debts frees up enough money to properly manage the secured debts and other living expenses. If you still can’t afford to continue with your mortgage or car payments, you do have the option to sell the asset or voluntarily surrender it to the secured creditor. If the secured creditor is unable to sell the house or car for the amount owing on the mortgage or car loan, the deficiency becomes an unsecured debt and can be included in a consumer proposal.
It’s also important to know that you cannot voluntarily exclude an unsecured creditor from your proposal.
Debts Excluded By Bankruptcy Law
Another consideration is that the Bankruptcy & Insolvency Act specifies certain unsecured debts that cannot be settled by a consumer proposal. The most common examples are family support obligations and government student loans where you have been out of school for less than seven years.
Consumer Proposals Do Not Settle Co-signer Obligations
A final consideration is that a consumer proposal does not remove the obligation of a co-signer or joint party. A common example is a parent who co-signs a bank loan for their child. In filing a consumer proposal, the original borrower’s obligation is settled. However, the bank is not stopped from going after the parent co-signer for the full amount.
Book A Free Consultation To Discuss Your Debts
Though it is not the same as personal bankruptcy, a consumer proposal is governed by the provisions of the Bankruptcy & Insolvency Act. Keep in mind that a consumer proposal can only be filed with a trustee licensed by the Federal government. If you are not talking to a trustee, you should ask for clarification about the authority of the “proposal” or program being discussed.
If you are considering filing a consumer proposal, contact an experienced local trustee for a free consultation.