Debts Included in a Consumer Proposal

Navigating the complexities of financial obligations can be overwhelming, but a consumer proposal provides a viable path to regain control. You might wonder, what debts can actually be included in a consumer proposal? The answer can significantly impact your financial future. In essence, a consumer proposal is a legally binding agreement that allows individuals to settle their debts for less than what they owe while protecting them from bankruptcy. Understanding which debts qualify for inclusion is critical for anyone considering this option.

Let's delve into the types of debts that can typically be included in a consumer proposal. Secured debts, unsecured debts, and specific exceptions will all be discussed in detail, allowing you to assess your situation accurately.

1. Unsecured Debts:
Unsecured debts are the primary type of debt that can be included in a consumer proposal. These debts are not backed by any collateral, meaning that lenders have no claim to specific assets if you default. Common examples include:

• Credit Card Debt: This is one of the most common forms of unsecured debt. Credit cards often have high-interest rates, making it difficult to pay off the balance, and they can accumulate quickly. By including credit card debt in a consumer proposal, you may be able to reduce the total amount owed.
• Personal Loans: These loans, often taken from banks or credit unions without collateral, are also eligible for inclusion. Personal loans can encompass a range of purposes, from consolidating other debts to covering unexpected expenses.
• Medical Bills: In many cases, medical bills that are not covered by insurance can also be included. This is particularly beneficial for individuals facing significant healthcare expenses.
• Payday Loans: These short-term, high-interest loans are notorious for trapping individuals in a cycle of debt. Thankfully, they can be included in a consumer proposal, allowing borrowers to alleviate this financial burden.
• Lines of Credit: Unsecured lines of credit, which allow consumers to borrow against a limit without providing specific collateral, can also be part of a consumer proposal.

2. Secured Debts:
While most secured debts cannot be directly included in a consumer proposal, you can still address them indirectly. Secured debts are tied to specific assets, meaning the lender has the right to seize those assets if you default. However, here's how they can be managed within the framework of a consumer proposal:

• Mortgage Loans: While you cannot include the total amount owed on your mortgage in a proposal, if you are facing difficulties keeping up with payments, restructuring the repayment terms through the proposal can provide relief. It’s crucial to remain current on mortgage payments to keep your home.
• Auto Loans: Similar to mortgages, you can propose to restructure the terms of an auto loan. While you cannot eliminate the debt, you may be able to negotiate a more manageable repayment schedule.

3. Debts That Cannot Be Included:
Certain types of debts are explicitly excluded from consumer proposals. These typically include:

• Child Support and Spousal Support: Obligations related to child and spousal support cannot be included in a consumer proposal. These debts are prioritized by law and must be paid in full.
• Court Fines and Penalties: Any debts resulting from court fines, such as traffic violations or criminal penalties, are not eligible.
• Student Loans: In many jurisdictions, federal or provincial student loans cannot be included unless the borrower has been out of school for a specific period, often 7 years.

Understanding the Process of a Consumer Proposal:
To initiate a consumer proposal, you’ll need to work with a Licensed Insolvency Trustee (LIT). This professional will evaluate your financial situation, assist in preparing the proposal, and negotiate with your creditors on your behalf. Here’s a brief overview of the process:

1. Assessment: The LIT will analyze your debts, income, and expenses to determine if a consumer proposal is suitable for you.
2. Proposal Preparation: Once it’s established that you qualify, the LIT will prepare a formal proposal outlining the terms, including the amount you can offer to repay your creditors.
3. Creditor Approval: Your creditors will have a chance to vote on the proposal. For it to be accepted, a majority of the creditors (in terms of dollar value) must agree.
4. Debt Repayment: If the proposal is approved, you will make monthly payments to the LIT, who will then distribute the funds to your creditors.

Benefits of a Consumer Proposal:
The advantages of opting for a consumer proposal are significant:

• Debt Reduction: You can settle your debts for less than you owe, providing substantial financial relief.
• Protection from Creditors: Upon filing a consumer proposal, creditors are legally barred from taking any collection actions against you.
• Credit Rating Improvement: While a consumer proposal will affect your credit rating initially, it can be less detrimental than declaring bankruptcy. Over time, as you make payments and complete the proposal, your credit score can recover.

Conclusion:
In summary, understanding the types of debts that can be included in a consumer proposal is essential for anyone considering this option. Unsecured debts like credit card bills, personal loans, and medical expenses can be addressed effectively, while secured debts can be managed through negotiation. By engaging with a Licensed Insolvency Trustee and taking proactive steps, you can regain control of your financial situation and work towards a more stable future.