What Happens to Joint Debt in a Consumer Proposal?

The Implications of Your Spouse Opting for a Consumer Proposal

When it comes to managing financial distress, a consumer proposal can be a highly effective tool. But, what happens if your spouse does a consumer proposal? How does it impact you, particularly if you have joint debts? Let’s explore.

Understanding the Concept of a Consumer Proposal

A consumer proposal is essentially a legal debt settlement arrangement made under the governance of the Bankruptcy and Insolvency Act in Canada. It enables debtors to negotiate with their creditors to pay back a portion of their debt over a specific period, usually up to five years.

Typically, a debtor may offer to pay between 20% to 50% of their total debt. The remaining balance is written off by the creditors, and the debt is considered fully paid. This type of non-borrowing debt consolidation is quite popular due to its flexibility and effectiveness in managing debt.

Applicability of a Consumer Proposal

Any Canadian owing between $1,000 and $250,000 (excluding mortgages on personal residences) may consider a consumer proposal as a viable debt management solution. If your debt exceeds $250,000, a different type of proposal could be an alternative. For joint proposals involving spouses or business partners, the total debt limit doubles to $500,000.

The Impact of a Spouse’s Consumer Proposal on You

In a marital or common-law relationship, each individual is a separate entity in the context of debt. This means that you are not legally obliged to repay your spouse’s debts, and vice versa, unless you’ve jointly signed for a debt or guaranteed it.

If your spouse opts for a consumer proposal, it does not alter this rule or make you responsible for their debt. However, if you have joint debts, the situation can be different.

What Happens to Joint Debt in a Consumer Proposal?

If you and your spouse have co-signed a debt, several scenarios can occur when your spouse decides to opt for a consumer proposal:

  • Joint Consumer Proposal: Both of you can choose to file a joint consumer proposal to consolidate and manage all your combined debts, including joint and individual debts.
  • Separate Consumer Proposals: Each of you can file a separate consumer proposal, including both shared and respective separate debts.
  • Mixed Approach: One spouse may opt for a consumer proposal, while the other files for personal bankruptcy or chooses to repay the joint debt.

It’s crucial to understand all your options and decide what would work best for your family unit.

How a Consumer Proposal Works

A consumer proposal is a highly confidential process. Only the creditors involved are usually contacted. If the debt is individual and not co-signed, it’s possible to resolve the debt without involving your partner at all.

However, the proposal process has several aspects to consider:

Asset Implications

Most consumer proposals deal with debt through monthly payments, so your assets (including those of your spouse) are generally unaffected. This includes assets tied to a secured debt such as a mortgage or financed vehicle.

Income Implications

Your income, as well as your spouse’s and other family members’, remains yours during a consumer proposal and does not need to be reported to the Trustee.

Credit Implications

A consumer proposal appears on your credit history for three years after completion (or six years from the start date, whichever is sooner). If the debt is solely your spouse’s and they opt for a consumer proposal, it does not affect your credit history or credit score.

The Risk of Untreated Debt

Undoubtedly, untreated debt can pose a potential risk both individually and to the family unit. For instance, jointly owned or even your spouse’s individual assets can be at risk of creditor actions.

To counter such risks, consumer proposals (and bankruptcy proceedings) offer automatic protection from creditors, safeguarding income and assets. Once a consumer proposal is officially filed, creditors can no longer contact you for payments, interest charges cease to accumulate, and collection actions must stop.

Although your spouse may not be obligated to pay your debts, the stress of debt can often have unwelcome effects on your household and relationships. Overcoming financial challenges and moving forward together, debt-free, can significantly reduce this stress.

Remember, in the world of debt, each person is their own entity, independent of the other. It’s crucial to understand your options, weigh the pros and cons, and make an informed decision that best suits your family’s financial situation.

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