Debt Relief Experts
Dealing with financial challenges often involves navigating through a web of debts, each with its own rules and consequences. Secured and unsecured debts pose different considerations, and understanding how a consumer proposal affects secured debt is crucial for anyone contemplating this debt relief option.
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Secured vs Unsecured Debt
Before discussing the impact of a consumer proposal on secured debt, it’s essential to distinguish between secured and unsecured debts. Unsecured debts include lines of credit, personal loans, credit cards and income taxes. Secured debts are those tied to specific assets, like a mortgage for a house or a car loan.
When you opt for a consumer proposal, you offer to settle your unsecured debts. This process allows you to manage your unsecured financial obligations, such as credit cards and personal loans, lines of credit, and income taxes, by proposing a repayment plan that fits your budget.
Filing a consumer proposal will help you pay back your unsecured debt with a payment that fits your budget and can free up room to make payments to your secured creditors.
Are Secured Creditors Included in a Consumer Proposal?
As in a bankruptcy, all your assets and liabilities must be listed on the documents you sign. Secured debts are acknowledged in the consumer proposal documents but are not inherently part of the proposal unless you decide to surrender the secured asset. If you wish to keep your secured asset, like a car or a house, you must continue to make payments to the secured creditor. The payments to the secured creditor are not part of your consumer proposal.
If you cannot afford your payments to the secured creditor or do not want to keep your secured asset, you can return the asset to the secured creditor, and the shortfall will be covered in the consumer proposal.
Your proposal administrator will notify your secured creditors you have filed a consumer proposal. However, if you keep your asset, the secured creditors do not participate in your proposal. Your agreement with them continues unless you stop paying the secured creditor.
In a consumer proposal, the secured creditors’ rights are not affected. They have the same rights after you file as they did before you filed. This means that the secured creditor has the right to realize the asset if you do not continue with your agreed-upon payments to them.
Consumer Proposal and Mortgages
Homeowners struggling with their unsecured debt often will file a consumer proposal as they can keep their home in the consumer proposal process. The equity available in the property will be considered when making an offer to your creditors. What about joint assets? If one spouse files and you own your home jointly, only the filing spouse’s share of the equity is considered as part of the consumer proposal value available to creditors.
During the term of the proposal your mortgage may come up for renewal. If it is auto renewed, there will likely be no changes. If you are asking to refinance the mortgage, your mortgage company may request that you pay off the proposal before processing the refinancing request.
Consumer Proposal and Car Loan/Lease
Many individuals rely on their vehicles daily, and a consumer proposal accommodates this need. If you have a car loan and file a consumer proposal, you can keep your secured vehicle by ensuring your payments are current before filing the proposal. Even after the consumer proposal is filed, you must continue making payments on the car loan.
For those with high car payments or an over-encumbered vehicle (owing more than its worth), surrendering the car to the secured creditor might be an option. The shortfall on the car loan becomes part of the consumer proposal.
If you decide to return the car, you’ll likely need an alternative means of transportation. This could involve purchasing a more affordable vehicle or securing a different vehicle loan. The advantage here is that the new loan won’t have negative equity, allowing for a more budget-friendly arrangement.
Final Thoughts
In conclusion, a consumer proposal can provide relief for unsecured debts, allowing individuals to manage their financial obligations while navigating the complexities of secured debts by either continuing payments or surrendering the asset with the shortfall covered in the proposal.
Speak to a Licensed Insolvency Trustee to help you decide if filing a consumer proposal is the right decision for you.
