Effects Of Consumer Proposal On Mortgage Or Car Loan

What is a consumer proposal?

A consumer proposal is a legally binding debt settlement agreement between you and your creditors. You work with a Licensed Insolvency Trustee to determine how much debt you can reasonably afford to pay back. Then they set up a payment plan that’s approved by your creditors. Once you make all the payments, your creditors discharge the remaining balances on your accounts.

Debts Eligible for a Consumer Proposal

A consumer proposal can be used for most types of unsecured debt. This includes:

  • Credit cards
  • Lines of Credit (LOCs)
  • Store credit cards or credit lines
  • Unsecured personal loans
  • Collection accounts

You cannot include court-ordered debts, such as alimony or child support arrears. You also cannot include student loans that are less than seven years old.

Secured debts—those debts that have collateral—can not be part of a consumer proposal. This includes:

  • Mortgages
  • Home equity loans and lines of credit
  • Car loans

How a Consumer Proposal Works

1. Find a Licensed Insolvency Trustee (LIT)

The Canadian government provides a helpful tool that allows you to find an active Licensed Insolvency Trustee based on your location. However, depending on where you live there may be dozens of trustees near you.

Take time to research trustees to ensure you will get the best service possible.

  • Visit the trustee’s website to check their credentials and experience
  • See if the trustee is accredited by the Better Business Bureau and how they’re rated
  • Look for independent reviews online through sites like Google and TrustPilot
2. Receive a free debt assessment

Once you find a trustee, they will schedule a free debt assessment. You will need to provide information on your:

  • Income
  • Assets
  • Liabilities (debts)
  • Expenses

One of the main goals is to determine if you are insolvent. Insolvency means that you’re your liabilities outweigh your assets, and you cannot reasonably afford to repay your debt. If you are insolvent, then the trustee will recommend bankruptcy.

If you can afford to repay at least part of what you owe, the trustee will recommend a consumer proposal.

The Licensed Insolvency Trustee will help guide you through the process to determine which option, consumer proposal or bankruptcy will best suit your needs while adhering to the federal Bankruptcy and Insolvency Act.

3. Craft your proposal

Once you decide to move forward with a proposal, the trustee will help you craft it. The trustee will review your finances to determine what you can afford to pay. They will also set the term, which defines the length of time for your proposal.

Pay consumer proposals in regular installment payments. It’s usually on a monthly schedule, however, it can be less frequent depending on your financial situation. The maximum term is 60 months.

4. Get credit approval

Next, the trustee will send the draft proposal to your creditors to get their acceptance. Creditors can vote to accept the proposal, reject it, or request a meeting of creditors.

The majority rules in this vote. If the creditors holding the majority of your debt vote “yes,” then the proposal passes. Even creditors that vote “no” must honour the arrangement.

In most cases, creditors will vote to accept a proposal. It provides them with some assurance that they will get paid something, which is often favourable to the alternatives. In rare cases, you may be required to attend a meeting of creditors with your trustee. The proposal would be discussed and voted on again.

5. File your proposal with the OSB

Once you receive the majority vote needed, it is then considered court-approved and held within the Office of the Superintendent of Bankruptcy (OSB).

The proposal will become part of a permanent public record held by the OSB. That may sound intimidating, but for most people, the ones that will know you filed a consumer proposal will be you, your creditors, and your trustee.

The good part of having your proposal filed with the OSB is that a stay of proceedings is issued. This means the law protects you from any lawsuits or collection actions. Your creditors must adhere to the terms of the proposal, so you get relief from collection calls and the stress of potential lawsuits and wage garnishment.

6. Complete the payment plan

Your proposal payments begin on the day stated in your formal agreement. You make fixed payments to your trustee and they distribute those payments amongst your creditors as agreed.

It’s important to make every effort to complete your payments on time. If you miss three monthly payments or one payment by more than three months, if you’re on a different schedule, then your proposal could be annulled.

If you find you are having trouble making the payments, particularly if your financial situation changes, contact your trustee as soon as possible. You may be able to amend your proposal at no charge.

During this time and prior to discharge, you must complete two mandatory financial counselling sessions. The goal is to help you develop better financial habits so you can avoid financial hardship in the future.

7. Receive release from your debts

Once you complete all the payments and counselling requirements, you will be legally released from the debts included in it.

The creditors will discharge the remaining balances on your accounts. They will report to the credit bureaus that the balance has been paid off.

Disadvantages of Consumer Proposals. Are They Bad?

A consumer proposal can provide debt relief, although filing a consumer proposal in Canada has consequences. But is a consumer proposal bad? Under what circumstances does a consumer proposal work as a way out of debt? When do the benefits outweigh the downsides?

Here are 8 possible disadvantages of a consumer proposal and how they may impact your decision to file a consumer proposal.

  • A consumer proposal will affect your credit score.
  • You will have to turn in all credit cards, and any lines of credit will be cancelled.
  • A consumer proposal does not deal with secured debt.
  • Your creditors may reject your proposal.
  • A consumer proposal cannot be filed if you owe more than $250,000.
  • Large creditors can dictate higher payment terms.
  • Some unsecured debts are not eligible for a consumer proposal.
  • If you miss three months’ payments, your proposal can be annulled.
  • Not sure if a consumer proposal is right for you?

Get consumer proposal advice from a Licensed Insolvency Trustee

A consumer proposal will affect your credit score.

A consumer proposal is debt restructuring. This means you’ve acknowledged to your creditors that you can’t pay back your debts in full. When you file a consumer proposal, a note is added to your credit report, which will hurt your credit score for a short while. A consumer proposal remains on your credit report for a maximum of six years. However, filing a proposal helps you eliminate debt, and high debt balances also hurt your credit rating. Getting out of severe debt is the first step to rebuilding credit.

You will have to turn in all credit cards, and any lines of credit will be cancelled.

Since you are settling your debts through a consumer proposal, you will no longer have access to those credit accounts. Creditors will close your accounts, and you are required to stop using your credit card and line of credit. Your trustee will ask you to hand back or cut up your cards. It is possible to obtain a new credit card within a year of filing a consumer proposal. You may qualify for an unsecured card or you may need to apply for a secured credit card, depending on your credit rating before you filed.

A consumer proposal does not deal with secured debt.

A consumer proposal covers only unsecured debts. Secured loans, such as a car loan or a mortgage, cannot be included in your proposal. This can be both a disadvantage and an advantage. If you can afford the monthly payments on your car or house, you can continue to pay the secured lender and keep those assets. However, if you cannot afford your car or mortgage payment, you can opt to surrender these assets back to the secured creditor. They can then file a claim in your proposal for any shortfall after selling the asset to pay back the loan.

Your creditors may reject your proposal.

Creditors have 45 days to vote in your proposal, and the weight of their vote is measured by how much you owe. A proposal can be rejected if more than 25% of your creditors (by dollar value) ask for a meeting, AND at the meeting, more than half of the creditor’s claims vote against your proposal. Consumer proposal rejections are rare. Licensed Insolvency Trustees are experienced at preparing consumer proposal offers, and most proposal terms are accepted as filed. If a creditor does not accept your initial offer, most will make a counteroffer. Your trustee will work with you to negotiate terms acceptable to both you and your creditors or may recommend rescinding your proposal if an agreement cannot be reached.

A consumer proposal cannot be filed if you owe more than $250,000.

Consumer proposals have a debt limit. A consumer proposal can only be filed if you owe less than $250,000 in debts not including the mortgage on your primary residence. If you owe more than the consumer proposal debt limit, you must file a Division I proposal. There is an added risk with a Division I proposal. If your creditors reject a Division I proposal, you are automatically bankrupt. This does not happen with a consumer proposal. If your creditors reject a consumer proposal, you are in the same position as you were before filing.

Large creditors can dictate higher payment terms.

Because creditors get a vote based on the dollar value of their claims, creditors with very large balances can demand a higher payout percentage. Most major bank creditors have a minimum percentage they will expect before voting yes on a proposal. If you owe a significant amount to one of these creditors, you may need to offer more in your proposal for it to be accepted. It is essential to work with a Licensed Insolvency Trustee who knows what creditors expect when deciding how much a consumer proposal might cost and what your monthly payment may be.

Some unsecured debts are not eligible for a consumer proposal.

Not all unsecured debts are eligible for discharge through a consumer proposal. A consumer proposal cannot release certain debts, including debts due to fraud, child support or alimony payments, and court fines. Student loan debt cannot be included if you have not been out of school for seven years.

If you miss three months’ payments, your proposal can be annulled.

A consumer proposal is a legal agreement between you and your creditors where you agree to a settlement amount with a fixed payment schedule. Most consumer proposals are based on monthly payments. If you fall behind three monthly payments, your consumer proposal is deemed annulled. When your proposal is annulled, your debts return, and you lose the benefit of the stay of proceedings provided in a consumer proposal that stops collection activity. Your creditors can now call, sue or garnish your wages again.

Not sure if a consumer proposal is right for you?

A consumer proposal is an alternative to bankruptcy. You may be looking at your debt relief options because you can’t repay your debts. A consumer proposal is intended to help you pay off debt faster.

Here are some positive points to consider about consumer proposals:

  • A consumer proposal is a deal to repay less than you owe so you get out of debt sooner.
  • It legally binds all your creditors to the same debt settlement plan. No creditor can back out.
  • It provided creditor protection against collection actions like a wage garnishment or lawsuit.
  • A proposal preserves any assets you have, such as tax refunds, investments and home equity.
  • It is generally the lowest cost debt consolidation. You have lower monthly payments than other options, including a debt consolidation loan or credit counselling.
  • You will have a fixed monthly payment and avoid the surplus income penalty that can be triggered if you file personal bankruptcy.

Car loan after consumer proposal discharge

It’s easier to get a car loan when you’ve successfully fulfilled the terms of the consumer proposal. When this happens, it will be easier to access various credit products, including car loans.

Your Certificate of Full Performance is proof that you completed your consumer proposal, so make sure you supply a copy to the lender.

Can you get a car loan while in a consumer proposal?

You can get a car loan while in a consumer proposal under certain conditions, even if you have bad credit.