Will My Spouse Be Affected By My Consumer Proposal?
If you have debts you can’t manage, it may be helpful to consider a consumer proposal to give your finances a fresh start.
However, many of our clients are worried about how a consumer proposal will affect their spouse.
More often than not, dealing with debts via a consumer proposal has no impact on your spouse.
However, there is one situation in which your decision to proceed with a debt relief plan can change things for your spouse; namely, if your spouse co-signed your debts.
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What are co-signed debts?
Co-signed debts are something you can experience for a variety of reasons.
Typically, you would know if your spouse co-signed any of your debts as you are involved in the process.
When you become insolvent, your co-signer is the next person creditors will contact to receive payment.
The responsibility of all co-signed debts falls onto your spouse when you file a consumer proposal.
Your spouse would have co-signed your debts in the following situations:
- You are a first-time borrower, or you have a poor credit history.
- Your borrowed money for a business.
- You needed to borrow more than you could afford to repay; therefore, a co-signed agreement increases your borrowing abilities.
- You didn’t have any collateral to secure the loan.
- The lender approved the loan because you had a guarantor who agreed to cover the debt in case you can’t pay.
Your consumer proposal must include by law all unsecured debts, including co-signed debts with your spouse.
The consumer proposal, however, does not forgive the debts on behalf of your spouse.
Co-signed liabilities are shared, which means your spouse becomes responsible for the debt.
Your spouse can’t pay co-signed debts
If your spouse can’t pay the co-signed debts on their own, without your contribution, you can consider filing a consumer proposal jointly.
Ideally, you want to attend your first consultation with a licensed insolvency trustee together to figure out the best way forward.
When the co-signer can’t pay for the debt alone, the consumer proposal that is filed together is administered as a single engagement by the trustee.
Upon its completion, both you and your spouse are free of the co-signed debt.
However, you are required to pay the agreed payment plan in the consumer proposal before the debt can be forgiven.
It can take up to 5 years before the consumer proposal is completed, and it will appear in both your credit report and your spouse’s as a debt relief plan.
Your spouse can pay co-signed debts
If your spouse is able to repay the co-signed debt in full, it might be tempting to leave the debt off the consumer proposal.
However, as a matter of law, all unsecured creditors have to be treated equally in your consumer proposal.
If your spouse pays the co-signed debt off, the trustee can reflect this in the list of your creditors.
The creditor for your co-signed debt becomes your spouse, for the amount they paid – as the former creditor has already received payment.
Your trustee will help evaluate the best debt management options for your situation and determine how to protect your spouse when you become insolvent.
How can you protect your spouse from co-signed debts?
BankruptcyCanada trustees help you understand how a consumer proposal affects your spouse.
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