Debts That Can and Cannot Be Included In a Consumer Proposal

What Debts Can I Include In a Consumer Proposal and What Debt Won’t Be Cleared?

A Consumer Proposal is a favorable debt management solution for many Canadians. It offers a structured repayment plan that allows individuals to achieve debt relief and protection from creditors. Devised under the Bankruptcy & Insolvency Act, a consumer proposal enables you to make a settlement proposal to your creditors, provided your debts (excluding your mortgage on your home) do not exceed $250.000. However, it’s essential to understand which debts you can and cannot include in a consumer proposal in Canada.

What is a Consumer Proposal?

A consumer proposal is a legal agreement set up by a licensed insolvency trustee. The trustee creates a proposal for your creditors where you agree to pay a certain percentage of your debts over a specific period, or extend the time you have to pay off the debts, or both. The term of a consumer proposal cannot exceed five years.

Types of Debt Included in a Consumer Proposal

A consumer proposal mainly handles unsecured debt. Unsecured debt refers to any form of debt that is not backed by an asset, like a house. Listed here are the debts you can incorporate in a consumer proposal:

  1. Credit Card Debts.
  2. Personal Loans.
  3. Lines of Credit.
  4. Payday Loans.
  5. Certain Student Loans.
  6. Income Tax Debts.

Note: A consumer proposal can be filed if your total debts do not exceed $250,000 (excluding mortgages on a principal residence). If your unsecured debts surpass this limit, consider consulting about a Division I proposal, which is also an available option under the Bankruptcy & Insolvency Act.

Can Secured Debts Be Included?

Secured debts, guaranteed by an asset, are excluded from a consumer proposal. On filing a consumer proposal, you have the option to continue paying your secured creditors to retain the asset or stop paying the secured creditor and surrender the asset to them.

If you default on a secured debt, the creditor has the legal right to take over the agreed asset and resell it to recover the loan amount. Some examples of secured debts include car loans (secured by the car) and mortgages (secured by the house).

However, if you wish to give up an expensive vehicle or your mortgage, any shortfall can be included in your consumer proposal.

Student Loan Debt in a Consumer Proposal

Student loans are automatically discharged in a consumer proposal as long as you have been out of school for at least seven years. The student loan debt then gets included with your proposal and is eliminated upon completion of all your payments.

Even if you have not ceased being a student at least seven years ago, you may still find relief from student loan debt by filing a consumer proposal because it will eliminate your other debts, potentially improving your cash flow to make meeting your student loan payments easier.

Business Debts and Consumer Proposal

If you are self-employed or operate a small business that is not incorporated and have incurred debts related to the business, those debts can be included in your consumer proposal. If you guaranteed a business loan and have been called upon to pay the obligation, you can include your personal liability in your proposal. Similarly, HST and source deduction obligations can be included in a consumer proposal.

Mandatory Inclusion of All Debts

All unsecured debts must be included when you file a consumer proposal. It’s not possible to exclude one or two specific creditors as a proposal is a legal process that deals with all creditors fairly.

Debts That Cannot Be Included

The Bankruptcy & Insolvency Act specifically excludes certain debts from being discharged in a consumer proposal. With a proposal, you cannot eliminate:

  1. Secured debts like your mortgage or car loan.
  2. Support payments or alimony obligations.
  3. Court fines and penalties, including parking tickets.
  4. Debts due to fraud.
  5. Student loans if you have been a student within the last 7 years.

Is a Consumer Proposal Right for Me?

A consumer proposal may be the right solution for your financial situation if you find yourself overwhelmed by unsecured debt. For many, it allows them to become debt-free by only repaying a small portion of what they owe. An added benefit to a proposal is that you get to keep all your assets, the equity in your home, and any other savings you may have.

If you’re ready to learn more about how a proposal can help you eliminate your debt, speak to one of our debt relief professionals. They provide you with a free, no-obligation consultation where they take the time to carefully analyze your monthly expenses and review all your debt options with you.

Conclusion

Understanding the type of debts that can and cannot be included in a consumer proposal is crucial before proceeding with the process. It can significantly affect your financial situation and future. If you’re considering a consumer proposal, it’s advisable to consult with a licensed insolvency trustee to guide you through the process and ensure that your financial interests are protected.

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