Eliminating debt can be a daunting task. With various financial relief options available, it becomes challenging to select the best way forward. One common solution for many Canadians is the consumer proposal. But, the question always remains, what debts are covered by consumer proposal? This article unravels the mystery and provides a comprehensive guide on the debts that can and cannot be included in a consumer proposal.
Consumer Proposal: An Overview
A consumer proposal is a legal settlement agreement between a debtor and their creditors. It’s an alternative to personal bankruptcy, governed by the Bankruptcy & Insolvency Act of Canada. The main goal of a consumer proposal is to help Canadians achieve debt relief while offering them protection from their creditors.
The process involves proposing an offer to your creditors where you commit to pay a percentage of what you owe over a specific period, or extend the time you are given to pay off the debts. The total amount you owe, excluding your mortgage, should not exceed $250,000.
However, not all debts are eligible for inclusion in a consumer proposal. Let’s explore the specifics.
The Debts You Can Include in a Consumer Proposal
The primary types of debt that can be included in a consumer proposal are unsecured debts. Unsecured debts refer to loans or credits that are not backed by an asset, such as a house or a car.
Unsecured Debts: An In-depth Look
Below are the unsecured debts that you can include in a consumer proposal:
- Credit Card Debts: These include all the outstanding balances you owe on your credit cards.
- Lines of Credit: Any unpaid amounts on your personal lines of credit can be included.
- Personal Loans: This refers to any non-secured personal loans you may have accumulated.
- Payday Loans: Short-term, high-interest loans, often used to cover unexpected expenses between paycheques, can be included.
- Certain Student Loans: Student loans can be discharged in a consumer proposal if you have been out of school for at least seven years.
- Income Tax Debts: Unpaid income taxes are also eligible to be included in a consumer proposal.
The total sum of these debts must not surpass the $250,000 limit, excluding your mortgage. If your unsecured debts exceed this amount, you may need to consider an alternative like a Division I proposal.
Secured Debts: Can They be Included?
Secured debts, which are loans backed by an asset like a house or a car, cannot be included in a consumer proposal. If you file a consumer proposal, you have two choices when it comes to secured debts:
- Continue making payments to keep the asset, or
- Stop paying and surrender the asset to the creditor.
If you decide to stop making payments, the creditor has the right to seize the asset to recover their loan. Examples of secured debts include car loans and mortgages.
However, if you choose to surrender an expensive asset or walk away from your mortgage, you can include any shortfall in your consumer proposal.
Student Loan Debt: A Special Case
Student loans are a unique case in consumer proposals. As mentioned earlier, they can be automatically discharged in a consumer proposal if you have been out of school for at least seven years.
If you are still within the seven-year period, a consumer proposal can still offer relief. Although it won’t eliminate your student loan debt, it can help improve your cash flow by eliminating other debts, thereby making it easier to meet your student loan payments.
Business Debts: Are They Covered?
A consumer proposal is designed to deal with personal debts. This means that debts owed by an incorporated business cannot be included. However, if you are a self-employed individual or operate a small unincorporated business, you can include business-related debts in your consumer proposal.
Total Inclusion: A Must in Consumer Proposals
All unsecured debts must be included when you file a consumer proposal. You cannot choose to exclude certain creditors. This is because a consumer proposal is a legal process designed to treat all creditors fairly.
The Debts You Cannot Include in a Consumer Proposal
Despite its comprehensive coverage, a consumer proposal cannot eliminate certain debts. 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.
Is a Consumer Proposal the Right Move for You?
A consumer proposal might be the best solution if you are overwhelmed by unsecured debt. It allows you to repay a portion of your debts, thereby helping you become debt-free. Moreover, it enables you to keep all your assets, which can be particularly beneficial if you have significant equity in your home or other savings.
If you are considering a consumer proposal, it is advisable to consult with debt relief professionals. They can help you analyze your monthly expenses, review all your debt options, and guide you on the best path towards financial freedom.
Conclusion: Understanding What Debts are Covered by Consumer Proposal
Eliminating debt can be overwhelming, especially when you’re unsure of your options. Understanding what debts are covered by a consumer proposal is the first step towards a debt-free life. While it doesn’t cover all debts, it provides a viable solution for a wide range of unsecured debts. With the right guidance and determination, you can navigate the path to financial freedom, one step at a time.
Remember, the journey towards financial freedom is a marathon, not a sprint. Take the time to understand your options, consult with professionals, and make the right choices for your financial health.
