Cosigned Debt in a Consumer Proposal
Falling behind on loan payments is never something taken lightly, but at times, it may be necessary to establish a consumer proposal to allow you to make adjusted payments and continue owning the asset, such as a house or car.
If possible, you may want to consider establishing a consumer proposal with any creditors you have, rather than filing for a personal bankruptcy.
The two differ in that when you claim bankruptcy, you are essentially surrendering your assets, and admitting you will not be capable of paying back any outstanding debts you have incurred, whether it be a mortgage, a car loan, etc.
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A consumer proposal, on the other hand, is a formal agreement with your creditors and a licensed insolvency trustee in which you pay back your debts on a different timeline that was originally established.
With a consumer proposal, part but not all of the specific debt is often forgiven.
This can be an advantageous choice if you are able to receive enough income to start making payments, but it is further complicated when you are not the sole borrower of the loan.
If you have no credit, or bad credit, you may have asked a family member to co-sign a loan with you, or to co-sign when trying to build up your credit with a credit card.
In the event that you are not able to make payments on a loan, mortgage, or credit card, you and your co-signer are at risk of being affected.
What happens to my co-signer when I file a consumer proposal?
So, what happens to your loan co-signer if you do file a consumer proposal?
Are they still responsible, or off the hook for any debt?
Unfortunately, your co-signer can not be exempt when you claim a consumer proposal.
A co-signer is legally responsible to pay back the debt when you are unable to do so.
With a proposal, any debtors are equally responsible.
It is, after all, the reason that companies are more apt to sign over a loan that has a co-signer.
What happens if my co-signer is my spouse?
Many times, a co-signer is that of a spouse.
In this scenario, it is likely there are multiple debts that are not able to be paid back.
Filing a joint consumer proposal is the most common option in this scenario, and is usually easier and less costly than filing the proposals separately.
However, if one spouse does not have financial problems of their own, you, as the borrower, can file an individual consumer proposal.
This eliminates your obligation to pay the debts you owe, but the spouse in good standing finances is responsible for repaying the portion of the debt.
The proposal will allow forgiveness of part of a loan, but the co-signer is accountable for the rest of the unforgiven loan.
If one spouse has good credit, this can be an ideal option so that not both spouses are left with poor credit, which can occur when a joint consumer proposal is filed.
Is a consumer proposal the right option for my situation?
Deciding what the right course of action might be if you are falling behind on payments is made more difficult when a co-signer is involved.
While it might be an uncomfortable conversation to have, being open and straightforward with the cosigner will reduce any surprises for the people involved.
If your co-signer wants to, you may discuss having them make any payments on the remaining debt and also securing the asset under their name as well.
Just as with a bankruptcy, a consumer proposal means that the creditor has the ability to pursue your co-signer to collect any remaining balance on a loan.
Can my co-signer switch the loan into their name?
Oftentimes, when a loan is co-signed, it can be switched over from you to the co-signer, so that making payments is simpler, and can reduce the chance of the loan going into default.
If, for example, a spouse can no longer make payments on a vehicle loan, a co-signer may choose to have the loan switched to their name so that the car remains in the family, and can be continued to be used.
If you’re confused with how consumer proposals may affect you or your co-signer, Bankruptcy Canada is here to help you sort through your options.
Our financial experts can explain any questions you may have, and help you decide if bankruptcy or a consumer proposal is the right scenario for you.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
Consumer Proposal Eligibility
How to Amend a Consumer Proposal