Navigating debt relief when another person has backed your loans requires clear legal planning. If you are considering filing a proposal to settle unmanageable debts, a critical question to answer is: “What happens to my co-signer, joint borrower, or guarantor if I file a consumer proposal in Canada?” Under Canadian insolvency law, while a proposal protects you from creditors, your co-signer remains fully liable for the remaining unpaid debt balance.
How Co-Signed & Joint Debt Works in Canada
When someone co-signs a personal loan, credit card, or auto financing agreement, they enter into a joint contract with the lender. In Canada, co-signers carry **joint and several liability**—meaning the creditor holds the legal right to collect 100% of the debt balance from either borrower if one defaults.
What Happens to Your Co-Signer When You File a Proposal?
When you submit a Canadian Consumer Proposal through a Licensed Insolvency Trustee (LIT), joint accounts are handled under specific statutory rules:
- Creditor Recovery from the Proposal Pool: The joint creditor receives dividend payments distributed from your proposal estate pool alongside all other unsecured creditors.
- Co-Signer Responsibility for the Shortfall: The lender can legally demand that your co-signer pay the remaining shortfall—the difference between the original total debt balance and what your proposal pays out.
- Impact on Co-Signer’s Credit Score: As long as your co-signer keeps up with the remaining shortfall payments or handles the loan directly, their own credit rating stays protected from collection default ratings.
What If Your Co-Signer Is Your Spouse?
If your co-signer is a spouse or family member who is also struggling with joint debts, two distinct approaches are available:
1. Filing a Joint Consumer Proposal
If both spouses hold substantial joint or individual unsecured debts, filing a Joint Consumer Proposal allows you to combine your debts into a single, affordable monthly payment. This provides legal protection for both partners simultaneously and is often significantly less expensive than filing two separate proposals.
2. Individual Proposal (Protecting One Partner’s Credit)
If your spouse has an independent income and good credit, you can file an individual proposal. Your proposal discharges your liability, and your spouse continues making payments directly on the joint account to preserve their clean credit rating and avoid an R7 notation.
Co-Signed Secured Debts: Cars and Mortgages
If the co-signed agreement is tied to a physical asset (such as a vehicle loan or home mortgage), you can retain the asset as long as monthly payments stay current:
- Keeping the Vehicle or Asset: Under the Bankruptcy and Insolvency Act (BIA), secured lenders cannot repossess property simply because you filed a proposal, provided contractual loan payments are maintained.
- Refinancing into Co-Signer’s Name: In many cases, if you choose to surrender your interest in an expensive vehicle, the co-signer can assume the full loan agreement to keep the vehicle in the family.
Consulting a Licensed Insolvency Trustee
Federally regulated Licensed Insolvency Trustees are officers of the court regulated by the Office of the Superintendent of Bankruptcy (OSB). An LIT will review all joint accounts, explain your co-signer’s exact legal exposure, and help you structure a proposal that safeguards both your finances and your personal relationships.