A common concern among my clients is how their cosigned debts will be treated in a consumer proposal. There’s a misconception that each person is responsible for half of the debt, when the reality is that each person is responsible for the full amount of the debt. That doesn’t mean that the lender or creditor can collect double the amount owed. It just means that the lender can collect the full amount from either party.
Therefore a joint debt means more than one person is legally responsible for repayment. Joint liability does not arise because of your relationship with a person. It comes from the contract with the lender. For example, a spouse is not automatically responsible for the other spouse’s debts.
Often times, the knee jerk reaction is to want to “exclude” the joint debt from a consumer proposal so that the other cosigner is not stuck with the debt. Unfortunately, that is not an option within the laws regarding consumer proposals.
A consumer proposal is made to all unsecured creditors even if there are joint debts as all creditors for a particular person should be treated equally. Otherwise, it would be unfair for one creditor to be paid in full while the other creditors receive only partial payment via the consumer proposal. However, it is important to note that while part of the debt is being paid via the proposal, the other joint party is still responsible for the remainder of the debt.
How cosigned debt is treated in different scenarios
What if a couple has large debts, both individual debts and joint debts
Both spouses have significant debts, some in each name individually as well as significant joint debt. They recognize that they both need help and a joint consumer proposal is a good option to get all the debts under control.
What if one spouse does not have much debt other than the joint debt?
A joint proposal makes sense if both parties have a lot of debt. But it doesn’t make sense to do a joint proposal if the joint debt is not particularly large and one spouse does not owe very much in their own name.
What if a couple separates or divorces when joint debts are still outstanding?
I’m often told that one spouse agreed to “take the joint debt” through a separation agreement. That’s all well and good if the debt is getting paid, but the separation agreement does not change the original agreement with the lender. Therefore, the lender can still go after the other spouse if the debt is not getting paid in full. When I encounter this situation, I ask about how the relationship is working after the separation. In cases where the separated or divorce couple has regular communication and an appropriate level of trust, I’ve done a joint consumer proposal so that both parties are protected. Being married is not a requirement of doing a joint proposal.
What if a parent cosigns a student line of credit?
If I’m meeting with the child/student, I ask in general terms about the parent’s finances. It may not make sense to go ahead with a consumer proposal if the joint debt is a significant part of the overall debt load and the parent is able to pay it, if required by the creditor. If I’m meeting with the parent/cosigner, the normal concern is hurting their child’s credit if he or she is still struggling to get established. In most cases, the child is already making the payments. If the parent files a consumer proposal, the child would just continue with the payments, and their credit is only hurt if they fall behind on the payments.
While I hope these different scenarios have been helpful in illustrating how joint debts can be treated, please keep in mind that different factors affect each circumstance. I recommend contacting your local licensed insolvency trustee, as they would be happy to answer any questions and help you get started on your plan to become debt free.