Misconceptions and urban myths about the type of debt that can be addressed through a consumer proposal still seem to exist. Most people assume have many different types of debt and are unsure if they will qualify. Debts to the Canada Revenue Agency, unsecured lines of credit, loans, debts where the creditor already has judgment, personal loans, loans with cosigners and guarantors can all be addressed in a consumer proposal.
In reality, a Canadian consumer proposal was designed to deal with many different kinds of unsecured debt. For many Canadians, it provides an opportunity to combine all their creditors into a single, affordable monthly payment while immediately stopping interest on included debts and preventing most collection activity from continuing.
Understanding exactly what debts can be included, and those that cannot, helps people make informed decisions rather than relying on misinformation they have found online.
All debts must be disclosed when making a consumer proposal, but the offer is to the unsecured creditors. It is possible to include secured debt in the consumer proposal by, for example, returning a vehicle with a market value of $25,000 but with $60,000 still owing and stating that the $35,000 shortfall to the secured creditor (more on that below) is to be included as an unsecured claim in the consumer proposal.
A consumer proposal is designed to deal with unsecured debt
A consumer proposal is designed to settle unsecured debts.
Unsecured debt is money you owe that is not backed by specific property. The opposite of unsecured debt is secured debt. The most common types of secured debt are the mortgage on the home and financing on vehicles, trailers, recreational vehicles and investment loans, etc.
With unsecured debts, if you are not up to date in payments usually needs to obtain court judgment against you so that the creditor can enforce collection by seizing your assets and garnisheeing income and bank accounts. With secured debt, the creditor has a much more direct right to seize the asset that you pledged as security for the loan, It is beyond the scope of this article to cover all the different types of secured loans and what steps the creditor has to take to enforce. With an unsecured loan, if you stop making payments, the lender cannot automatically repossess an asset because nothing was pledged as security when the debt was created.
Many Canadians are confused by which of their debts fall into each category.
Although every financial situation is unique, a consumer proposal usually includes several different creditors at the same time, making repayment significantly easier to manage.
Credit card debt
Credit card balances are a common debt included in a consumer proposal.
Many people struggle through years making minimum monthly payments while interest charges consume most of what they pay. It is not unusual for someone to owe several different credit card companies, each with its own payment schedule, interest rate, and collection activity.
Rather than trying to keep up with multiple unsecured creditors, a consumer proposal combines those obligations into one legally binding settlement based on what you can reasonably and fairly afford.
Lines of credit and personal loans
Unsecured personal loans and unsecured lines of credit are also commonly included.
These debts often begin with manageable monthly payments but become increasingly difficult after interest rates rise, income changes or household expenses increase. Some people initially use a line of credit to consolidate other debt (in a genuine attempt to lower interest rates and simplify their payments), only to find that they had to also start using the credit cards again and are now carrying both the original debt and a growing line of credit balance.
Provided the loan is unsecured, in most cases it will be part of a consumer proposal.
Canada Revenue Agency tax debt
Many Canadians are surprised to learn that CRA debt may also be included.
Income tax balances, GST or HST obligations for sole proprietors, and certain other personal tax debts are frequently included in consumer proposals. Since CRA has significant collection powers, including wage garnishments, freezing bank accounts, and registering liens in some circumstances, addressing tax debt early can make an enormous difference.
The fact that the creditor is the federal government does not automatically prevent the debt from being included.
Payday loans
Payday loans are often the tipping point from surviving financially to drowning in debt. These loans are high interest and relatively easy and fast to access in emergencies. Unfortunately, they can trap you in a cycle.
Many people initially borrow only a few hundred dollars to deal with a temporary cash shortage. Before long, another loan is needed to repay the first one, and the cycle repeats itself until several payday lenders are involved.
These unsecured loans can be included in a consumer proposal, allowing borrowers to break the cycle rather than continually renewing expensive short-term debt.
Debts in Collection
Simply because a debt has been sent to collections does not mean it must be dealt with separately.
Many collection accounts originate from unpaid credit cards, personal loans, utility bills, cellphone contracts, or other unsecured obligations. These debts usually qualify to be included alongside other unsecured creditors in a consumer proposal.
For many people, this provides immediate relief from ongoing collection calls and letters while replacing multiple payments with a single monthly obligation.
What debts cannot usually be included?
While a consumer proposal is an effective solution for many types of unsecured debt, there are exceptions. Even if certain debts are not allowed to be included, the fact that you have reduced or reorganized the debts that may be included in the consumer proposal means that you can better manage the excluded debts.
Secured debts are generally not included. A mortgage on your home or a vehicle loan, for example, is secured by the property itself. If you want to keep the house or vehicle, you must continue making those payments according to your agreement with the lender.
Debts that Survive your consumer proposal
Certain debts (as laid out in section 178 (1) of the Bankruptcy and Insolvency Act) are not extinguished (set to zero) when your consumer proposal is fully performed. These debts must be included in your consumer proposal and the creditors to whom survivable debts are owed may also share in the amount offered under the consumer proposal (thereby reducing the amount that will survive). You cannot force these creditors to participate in the consumer proposal.
Speak with a Licensed Insolvency Trustee to be properly informed about your debts and those that may survive. Below is a list of such debts:
- Fines or penalties imposed by court (including a restitution order resulting from an offence)
- An award by a civil court for sexual assault, intentional bodily harm or causing wrongful death
- Alimony (spousal support)
- Child support
- Debt due to fraud, misappropriation, etc. while acting in a fiduciary capacity
- Debt due to obtaining property or services by false pretenses or fraudulent misrepresentation
- The amount of a dividend a creditor would have received had you not failed to disclose the debt when filing the consumer proposal
- Federal or Provincial student loans (including a loan under the Apprentice Loans Act survive unless you were last a student more than seven years prior to the filing of the consumer proposal
- Any debt for interest in respect of the above.
While the above list is in simplified format, the legal meaning of many of these terms is quite complex and you should always discuss with your Licensed Insolvency trustee or lawyer.
Not All Debts are Treated the Same Way in a Consumer Proposal
As noted above, generally secured creditors are kept outside of the consumer proposal if you want to keep the item (house, car, etc.) that you pledged as security.
Even though all the other debts are considered unsecured debts (some of which may survive as discussed above), within the unsecured debts some are paid in preference to (that is before) the other unsecured creditors are paid out of the money offered as a settlement in the consumer proposal.
These debts are listed in section 136 (1) of the Bankruptcy and Insolvency Act. They are summarized below and again it is important that you fully discuss these with the Licensed Insolvency trustee to ensure you are properly informed:
- Reasonable funeral and testamentary costs of a deceased
- Costs of the Administrator (who must always be a Licensed Insolvency Trustee) for the consumer proposal
- A levy to the Federal Government (Office of Superintendent of Bankruptcy who supervises all consumer proposals)
- Certain unpaid wages, etc. to your employees
- Family support obligations that relate to the past year
- Municipal taxes in the past two years (but not property tax which is a secured debt)
- Landlord for the rent in respect of the three months immediately preceding the consumer proposal plus accelerated rent for up to three more months if the lease provided for that (with limits).
- There are other items listed that are beyond the scope of this article
Common misconceptions about consumer proposals
Because there is so much information online, many people delay seeking advice after reading something that simply is not accurate or seems too complex.
One of the most common misconceptions is that you can only file a consumer proposal if you owe a certain type of creditor. That is not the case. What matters is the nature of the debt and whether it qualifies under the Bankruptcy and Insolvency Act.
Another misconception is that if you owe money to several banks, each debt must somehow be negotiated separately. A consumer proposal is a single legal proceeding that is offered to all unsecured creditors together. Once accepted, the same settlement applies according to the terms of the proposal.
People also worry that they cannot file because they own a home, have a vehicle, or earn a good income. None of those factors automatically prevent someone from qualifying. Every proposal is based on the individual’s overall financial circumstances rather than a single factor.
Why knowing your debt matters
Before recommending any solution, a Licensed Insolvency Trustee will consider with you your full financial picture.
That means identifying every creditor, confirming whether each debt is secured or unsecured, reviewing outstanding tax obligations, examining any legal proceedings that may already be underway, and understanding your household income and expenses.
Many people discover debts they had forgotten about, collection accounts that have changed ownership several times, or old balances that have continued growing because of interest and penalties. Having a complete picture allows the Trustee to determine which debts can be included and whether a consumer proposal is the most appropriate solution.
One payment instead of many
For many Canadians, one of the main benefits of a consumer proposal is its simplicity.
Instead of managing multiple payment dates, different interest rates, and constant communication from various creditors, eligible debts are combined into one affordable monthly payment that fits within the person’s budget.
Interest stops accumulating on the debts included in the proposal, and once the proposal has been filed, most collection activity also stops. That allows many people to focus on rebuilding their finances instead of constantly trying to decide which creditor should be paid first each month.
At the heart of the law that allows you to deal with your debts under a consumer proposal are:
- Honesty – make full disclosure of all you owe and all you own as well as household income and expenses
- Fairness – the consumer proposal must be fair to the creditors and, to be workable, fair to you. You avoid bankruptcy and the creditors will likely recoup a little more than they would in a bankruptcy (the creditors’ incentive to accept the consume proposal).
Every financial situation is different
Although consumer proposals help thousands of Canadians every year, they are not automatically the right solution for everyone.
Some people are in a position to repay their debts through budgeting changes or debt consolidation. Others may benefit from refinancing or a program in Alberta known as Orderly Payment of Debts. Still others, particularly those with lower debt levels may be able to use a licensed credit counselling agency. In more serious situations, bankruptcy may be the more appropriate option.
The important thing is not trying to determine the answer yourself based on information from the internet. It is having your financial situation reviewed by a Licensed Insolvency Trustee (these initial consultations are usually without cost) who is legally required to explain every available option, not just one solution.
Speak with Baigel Corp.
If you have been wondering what types of debt can be included in a consumer proposal, the best way to find out is to have your situation reviewed by a Licensed Insolvency Trustee.
Baigel Corp. www.baigel.ca provides confidential, no-charge consultations where our federally licensed and regulated Licensed Insolvency Trustees will review your debts, explain which obligations may qualify, and help you understand every option available. Whether a Canadian consumer proposal, another debt solution, or simply a repayment strategy is the right fit, our goal is to help you move forward with confidence and a clear understanding of your choices.
The sooner you understand your options, the sooner you can begin replacing financial uncertainty with a practical plan for the future.
*Baigel Corporation is a federally regulated Licensed Insolvency Trustee