When you file a consumer proposal in Canada, you should always meet with a Licensed Insolvency Trustee (LIT). LIT’s are licensed by the federal government to act as administrators of consumer proposals and bankruptcies. They can properly assess your situation and let you know how each of your debts are treated in a consumer proposal. This article will explain which debts can be included in a consumer proposal and any limitations on what debts can be eliminated.
When you meet with an LIT, you must let them know what all your debts are. You must include all of your unsecured debts in a consumer proposal, which means you can’t pick and choose which debts to include, or which debts to leave out. The type of creditor will dictate how their debt is handled.
Basically there are two types of creditors. There are unsecured creditors, and secured creditors, and those debts are handled differently in a consumer proposal.
An unsecured creditor is a lender or entity to which an individual or company owes money for services provided. Unsecured creditors do not hold security or collateral from the borrower. Examples of unsecured creditors are:
- Certain bank loans
- Credit cards
- Payday loans
- Loans from individuals
- Student loans and,
- CRA debts (income tax, HST)
As previously mentioned, you have to include all unsecured debts in your consumer proposal. Each creditor has the opportunity to vote on the acceptance of your consumer proposal. As long as over 50% your unsecured creditors (based on the dollar amount you owe them), accept your proposal, then all unsecured creditors are bound by it. Yes, this even includes the ones that voted against your proposal.
Let’s review each type of loan.
Bank Loans and Credit Cards
These are the normal debts that most people who are borrowing have. These include bank loans, lines of credit, overdrafts as well as credit cards. If the bank loan is large enough, you may have been asked to give the bank security. If they have taken your house or car as security, the debt is secured and will have to be paid. If the security is a co-signer, then the co-signer will have to pay the debt but it will be included in your consumer proposal.
Canada Student Loans
This is one of the debts that is most misunderstood. In order for government registered student loans to be a dischargeable debt in a consumer proposal, your end of study date has to be over seven years. If it is under seven years since the last time you were enrolled, they will resume collection after your final payment has been made in your consumer proposal. The reason for the end of study date is because the loans are not payable until after you have completed being a full time student.
Once you have completed the seven year moratorium, student debt can and will be included in a consumer proposal.
Income Tax Debts
Personal tax, employee deductions, HST, director’s liability can all be included in a consumer proposal. In fact, the only way you can legally pay less tax than you have been assessed is by a bankruptcy or a consumer proposal. The mistake most people make is that they hear that Income Tax is exempt in the United States and assume the same is true here. It is not and never has been. Prior to 1993, taxes were a preferred debt but in 1993 they became an unsecured debt just like bank or credit card debt.
Debts in Collections
A number of people working for collection agencies will tell you that they do not care if you file a consumer proposal, they will still insist on payment. This is also false, it is a tactic to get you to pay them and get rid of their debt. They want their commission. In truth because the debts were bought from creditors who are included, these debts are included also.
Like collection agencies, some payday loans personnel will tell that their loans are exempt. That is not true. They are just like any other debt incurred by borrowing and are subject to a consumer proposal. An accepted consumer proposal will finalize payday loan debts.
Are there any other exceptions?
Co-signed debts or joint creditors also have to be included in your consumer proposal. The only challenge with that is the creditor will simply turn around and start collecting payments from your co-signer. So now your co-signer is liable and must pay down your debt or their credit could be affected.
Also, if an unsecured creditor has a registered lien against your property, that debt would essentially become a secured creditor. Because it’s now a secured creditor, you would have to settle that debt on your own.
A secured creditor is generally a bank or other asset-based lender that holds a charge or security over an asset, such as a mortgage or a car loan.
There are two options with secured creditors:
- You can decide to keep the secured asset and you are required to keep up with current payments on that loan, or
- You can surrender the asset back to the secured creditor.
If you choose option two, you must cooperate with the secured creditor in returning the asset so that the debt can be included in the consumer proposal. Although all creditors (both secured and unsecured) are notified when you file a consumer proposal,the only debts included in a consumer proposal are your unsecured debts.
Is a Consumer Proposal a Good Method of Dealing with your Debts.
If you are unable to manage the payments on all your unsecured debt, or if you cannot consolidate your outstanding credit into one affordable monthly payment to pay off your debts, you may be looking for another solution. Because a consumer proposal handles all your debts at once, you know that all your creditors are being paid at the same time and on the same basis. There is no longer one creditor being ignored, or one getting a higher percentage than the others. Also creditors cannot take legal action so there is no possibility of you being garnisheed if the creditor is informed of the proposal. Also once accepted and when all the creditors are aware of the proposal, the collection calls will stop. When completed the debts will be considered paid in full for the agreed upon lesser amount. And you will be able to pay off your debts in a more affordable manner.
If you are having problems with any or all of these types of debt, or have questions whether or not your debt qualifies for a consumer proposal, book a free consultation with a consumer proposal administrator today.