Understanding What Debts You Can and Cannot Include in a Consumer Proposal

What Debts Can I Consolidate With a Consumer Proposal?

When dealing with financial difficulties, it can be overwhelming to determine the best course of action. One such option, particularly for Canadians, is a consumer proposal. A consumer proposal is a formal, legally binding process under the Bankruptcy and Insolvency Act, which essentially allows you to make a compromise with your creditors. However, not all debts can be incorporated into a consumer proposal. Let’s explore Debts You Can and Cannot Include in a Consumer Proposal.

What is a Consumer Proposal?

A consumer proposal is an alternative to bankruptcy, where you offer to pay creditors a percentage of what is owed to them or extend the time you have to pay off the debts, or both. The total amount you owe, however, cannot exceed $250,000 (excluding the mortgage on your principal residence).

Which Debts Can Be Included in a Consumer Proposal?

A consumer proposal is designed to handle unsecured debts. Unsecured debts refer to debts that are not linked to an asset; thus, no property can be seized if you default.

In a consumer proposal, you can include the following unsecured debts:

However, the unsecured debts must not exceed $250,000. If they do, you can discuss a Division I proposal with your Licensed Insolvency Trustee.

The Case of Secured Debts

Secured debts are those debts which are backed by an asset, like a car or a house. Should you default on the loan, the creditor has the right to take possession of the collateral.

Examples of secured debts include:

  • Car loans;
  • Mortgages.

Secured debts cannot be included in a consumer proposal. If you choose to file a consumer proposal, you have the option to continue paying your secured loans to keep the collateral or you can stop paying and surrender the asset to the creditor. If you choose to give up an expensive vehicle or let go of your mortgage, any shortfall can be included in your consumer proposal.

Student Loan Debt and Consumer Proposals

The situation with student loans is a bit different. If you have been out of school for at least seven years, your student loans will be automatically discharged in a consumer proposal. If you have not been out of school for at least seven years, you may still find relief from student loan debt by filing a consumer proposal because it will eliminate your other debts, potentially making it easier to meet your student loan payments.

Business Debts and Consumer Proposals

A consumer proposal is filed by an individual to deal with personal debts. It does not handle debts owed by an incorporated business. However, 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.

Debts That Cannot Be Included in a Consumer Proposal

Certain types of debts are excluded from being discharged in a consumer proposal according to the Bankruptcy & Insolvency Act. These include:

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

Deciding if a Consumer Proposal is Right For You

A consumer proposal could be the perfect solution for your financial problems if you find yourself drowning in unsecured debt. It allows you to become debt-free by only repaying a small portion of what you owe, while also allowing you to keep your assets, the equity in your home, and any savings you may have.

If you’re ready to explore how a proposal can help you eliminate your debt, speak to one of our debt relief professionals for a free, no-obligation consultation where our trustees will carefully analyze your monthly expenses and review all your debt options with you.

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