Incorporating Your Vehicle Loan Debt in a Consumer Proposal
If you’re overwhelmed by financial obligations and considering a consumer proposal as a resolution, you might be questioning, “Can you include your car loan in a consumer proposal?” Like many individuals, you may have a car loan among your total liabilities. Let’s delve deeper into this topic and shed some light on how a car loan is treated in a consumer proposal.
Understanding Consumer Proposals
A consumer proposal is a government-sanctioned debt relief program that permits you to repay a part of your debts rather than the entire sum. However, not all debts qualify for inclusion in a consumer proposal. Primarily, it covers unsecured loans like credit cards, lines of credit, payday loans, certain types of student loans, and income tax debt.
Unsecured loans are those which aren’t backed by any asset, implying the lender can’t seize any item from you to offset the balance in case of default.
Car Loans: Secured or Unsecured?
A car loan is classified as a secured debt, with your vehicle serving as collateral for the lender. Consequently, it can’t be incorporated in a consumer proposal along with your unsecured debts. Hence, even if you opt for a consumer proposal, you’re required to continue with your monthly car loan installments.
If you fail to make these payments, your lender has the right to reclaim your vehicle and sell it to repay the remaining loan balance.
However, there is a specific situation in which a portion of your auto loan can legally be added to your consumer proposal.
The Exception: When Can a Car Loan be Included in a Consumer Proposal?
Suppose you’ve missed several payments, resulting in the lender repossessing your vehicle, which is then sold at a loss. The money generated isn’t sufficient to cover the loan balance. In such a case, you’re responsible for the remaining amount.
Interestingly, since there’s no longer an asset backing the remaining balance, the loan automatically transforms into an unsecured debt. Thus, it becomes eligible for discharge through a consumer proposal like any other unsecured loan.
This scenario could arise if you financed the purchase of a new car, especially a high-end luxury brand. Depending on the make and model of your vehicle, its value can depreciate rapidly, leaving you with negative equity, also known as “underwater” or “upside down” car loan.
Consumer Proposal’s Impact on Car Loan Payments
While a consumer proposal doesn’t eliminate your car loan payments, it does reduce your overall unsecured debt burden. As a result, you’ll have additional funds to allocate towards your car loan, reducing the likelihood of missed payments.
Moreover, a consumer proposal mandates you to make fixed monthly payments to your unsecured creditors over a period of five years. Under no circumstances will you be required to surrender your assets, including your vehicle, to settle your debt.
Obtaining a New Car Loan Post Consumer Proposal Filing
Assuming you’ve surrendered your vehicle to your lender and subsequently filed a consumer proposal, you might wonder if you can get approved for a new car loan while your proposal is in effect.
The answer is affirmative. However, bear in mind that a consumer proposal will cause a temporary dip in your credit score. This makes lenders more cautious about extending credit to you.
You’ll encounter stricter loan qualification requirements and higher interest rates. You may also need to secure a co-signer to qualify for a car loan at a reasonable interest rate.
To secure the best car loan rates and terms, you’ll need to diligently rebuild your credit and maintain a steady income and reasonable debt-to-income ratio.
Struggling with Car Loan Payments? Here Are Your Options
If repaying your car loan is proving to be a challenge, there are several solutions you can explore for financial relief. Your ideal option primarily depends on whether you wish to retain your car and your lender’s flexibility regarding the terms of your loan contract.
Refinancing or Renegotiating Loan Terms
If you don’t want to surrender your vehicle, you can discuss with your lender about refinancing your loan at a more favourable rate, or negotiate a new payment plan. However, securing a lower rate or loan extension may prove challenging if your credit has deteriorated since you first obtained your loan.
Transferring Your Loan to Someone Else
This is a viable option if you can find a friend or family member willing to assume responsibility for your loan. Given the increased risk, not all lenders will consent to this arrangement, so it’s advisable to contact your car loan provider and inquire if they allow auto loan transfers.
Selling or Trading in Your Vehicle
Occasionally, selling your car is the best option to alleviate your budget stress. You can use the sale proceeds to repay your loan. If you need a vehicle, consider trading in your current one for a cheaper alternative. The money you receive from the trade-in can be used to cover your car loan. If there’s any leftover, you can apply it as a down payment for a new car.
Voluntary Repossession
In some cases, voluntary repossession is the most effective way to escape a burdensome auto loan. However, as it’s essentially a loan default, it will significantly impair your credit score.
Final Thoughts
Before filing a consumer proposal, it’s crucial to ascertain whether you can afford to continue with your car loan payments. A consumer proposal will reduce your unsecured debt commitments, enabling you to manage your car loan payments more effectively.
However, if you’ve exhausted all your options and anticipate defaulting on your auto loan, it’s advisable to arrange a voluntary repossession before filing your proposal.
Once your lender sells your vehicle, they’ll use the proceeds to cover the balance owed. If the funds received from the sale are insufficient to retire your loan, you’re financially liable for the shortfall. At this point, you can add the leftover balance to your consumer proposal as it’s now an unsecured debt.
If your car loan and other unsecured debts are straining your finances, it might be wise to contact a Licensed Insolvency Trustee (LIT) to explore whether a consumer proposal is your best option for financial relief.
An LIT can assist you in determining how much debt you can eliminate and the impact of filing a proposal on your car loan. If you can discharge a significant portion of what you owe, you’ll free up enough cash in your budget to stay current with your car loan.
At Bankruptcy Canada, we’ve been assisting people across Canada in freeing themselves from crippling debt payments for over 20 years using consumer proposals. Contact us today for a free, no-obligation consultation to learn how this debt relief program can put you on the path to financial recovery.
