Debt is a common reality for many individuals, and when it spirals out of control, finding a viable solution can be a daunting task. One of the questions that often arise revolves around cosigned debts — specifically, how is cosigned debt treated in a consumer proposal?
In this article, we aim to shed light on this topic, providing an in-depth understanding of cosigned debt, its implications in a consumer proposal, and how to navigate different scenarios involving cosigned debt.
Defining Cosigned Debt
Cosigning a loan is a significant financial commitment. It means both the borrower and the cosigner sign the loan agreement, and the cosigner pledges to repay the loan if the borrower is unable to do so. This responsibility doesn’t stem from personal relationships; rather, it is the result of a written agreement that legally binds the cosigner to the debt.
By cosigning a loan, you accept joint and several liabilities for the total amount of the debt. This implies that in the event of a consumer proposal filed by the borrower, the cosigner remains accountable for the remaining debt.
Cosigned Debt in a Consumer Proposal
A consumer proposal is a legally binding arrangement made between a debtor and their unsecured creditors, allowing the debtor to repay a fraction of the owed amount. So, how is cosigned debt treated in a consumer proposal?
Once a consumer proposal is filed, the borrower can pay off a portion of their debt, leaving the cosigner to shoulder the remaining amount. It’s important to note that it’s not possible to exclude a joint debt from a consumer proposal to save the cosigner from the debt. The law stipulates that all unsecured creditors must receive equal treatment, including those with joint debts.
Handling Cosigned Debt in Various Situations
Given the complexities surrounding cosigned debt, it’s crucial to understand the different scenarios that can arise and how to handle them.
Case of a Debt-Ridden Couple
If both partners are dealing with significant debt—both individual and joint—a joint consumer proposal could be the solution. This approach simplifies the process and is often more cost-effective than filing separately.
Situation of an Indebted Spouse
In cases where one spouse has little debt other than the joint obligation, the indebted spouse can file a consumer proposal. This process eliminates the indebted spouse’s liability, leaving the cosigning spouse to repay the residual cosigned debt. It’s a practical strategy for maintaining one spouse’s good credit rating while addressing the other’s overwhelming debt.
Scenario of Separation or Divorce
Separation or divorce can complicate matters of joint debt. Even if one partner agrees to shoulder the joint debt through a separation agreement, this doesn’t alter the original agreement with the lender. If the debt isn’t paid off fully, the lender can still pursue both parties. In situations where trust and communication between the separated or divorced couple are intact, filing a joint consumer proposal can be an effective way to ensure both parties are protected.
Parental Cosigning of Student Loans
If a parent has cosigned a student loan or other debt for their child, and the child is unable to repay the loan, the parent becomes responsible for the repayment. If the child doesn’t have significant other debts, it might make more sense to work together to repay the cosigned loan. However, if the child has considerable other debts, filing a consumer proposal or bankruptcy may be the best course of action.
Conclusion
Navigating the complexities of how cosigned debt is treated in a consumer proposal requires careful thought and planning. The first step towards an informed decision is to seek professional advice. A Licensed Insolvency Trustee can provide a free, confidential consultation to review your situation and suggest the best way forward.
