How are Debts affected by a Consumer Proposal?
TWO TYPES OF DEBT
In order to assess the nature of the debts you hold and how they are affected by a Consumer Proposal, one needs to know the type of contract you signed and the conditions imposed in the Agreement. Principally, there are two types of debts, Unsecured and Secured Debts.
Unsecured debts are often referred to as trade debts and typically include credit cards, lines of credit, overdrafts, utility and general everyday bills most of us have to pay each month. In a Consumer Proposal, unsecured creditors are unable to enforce their claim against you and automatically upon filing a Consumer Proposal you are granted a stay of proceedings protecting you from these creditors. Unsecured contracts are suspended by a Consumer Proposal, and if you complete a Consumer Proposal and receive a Certificate of Full Performance, a creditor’s ability to collect comes to an end and your debts are forgiven.
Secured debts often originate with the purchase of a significant asset such as a car, home, recreational vehicle, etc., etc., and are supported by a Security Agreement which allows the creditor to repossess or take back the asset(s) if you fail to pay or break the terms of your Agreement with that creditor. Examples of secured debts include Car Leases, Home Mortgages, Rent to Own and Installment purchase contracts, where an asset is pledged or given up as security or given as collateral to be taken back if you do not pay. If your Consumer Proposal is accepted and you receive a Certificate of Full Performance and do not pay, the creditor cannot make you pay, and their only recourse or chance of recovery is limited to the pledged asset(s) itself.
If you get or have a consolidation loan, it is very likely that the creditor had you execute a Promissory Note, and took security in the form of a General Security Agreement, with a lien on your asset(s). Although it does not happen in most cases, creditors holding a Promissory Note may elect to demand full payment, and if you don’t pay in full, repossess the asset, notwithstanding that you want to continue your payments and keep the asset(s). A Consumer Proposal will not prevent this if a creditor elects to make the demand for full payment.
If a person wants to keep an asset, it is important to keep a good relationship with that creditor. If you owe significantly more than the asset is worth, you may want to consider giving the asset back, with the result that you have no further obligation to pay.
CO-SIGNERS / GUARANTORS
In some cases, creditors may have taken a guarantee or had someone co-sign on your behalf and they will have to pay that debt if you don’t. In many cases, co-signers and guarantors are family members or persons related to the borrower, who you probably want to pay back.
Once you complete your Consumer Proposal, and receive a Certificate of Full Performance, you are at liberty to pay back your relatives or any other party you choose. Repayments to a relative after you have received a Certificate of Full Performance can be made by you on a voluntary basis, and are considered gratuitous payments made by you, which you were under no legal obligation to make.
Government debts in many cases are treated exactly the same as unsecured debts and include Income Taxes, GST and directors’ liabilities for unpaid company debts.
HRDC debts, WCB, or Employment Insurance benefits received by someone while ineligible are, however, treated very differently and monies received and consumed while ineligible cannot be written off in a Consumer Proposal and, in most cases, must be repaid.