Although you and your spouse may not have a legal obligation to repay each other’s debts, the financial pressures and worries of dealing with debt are often shared, potentially impacting your household and adding stress to your important relationships.
Consumer Proposals are a unique type of non-borrowing debt consolidation that you and/or your spouse may consider as you explore options to deal with debt, and many people have questions about what effects their spouse doing a Consumer Proposal may have on them, and their household. Read on as we address common questions about how couples’ debts, assets, income, credit ratings and more each will – and won’t – be impacted by doing a Consumer Proposal debt consolidation.
What is a Consumer Proposal?
A Consumer Proposal is one of two main legal debt solutions available in Canada to help individuals deal with their debts. They have been around for decades, but changes to the rules for Consumer Proposals in the late 2000’s made them more accessible and more popular than ever.
Combining the advantages of debt consolidation with legal backing and the ability to negotiate partial debt write-offs, Consumer Proposals are one of the best and most powerful ways to get debt paid off. Here are the basics of how a Consumer Proposal works:
- A Consumer Proposal allows you to combine and manage all your debt into one consolidation where you will offer to repay an affordable amount of your debt back over a period of up to five years.
- Most people offer to repay 20-50% of their total debts by making monthly payments.
- Creditors will agree to write-off/forgive the unpaid portion and consider your debt paid in full.
- You can include almost every kind of debt, including but not limited to: credit cards, overdrafts, payday loans, lines of credit, government debts such as tax debts, student loans and more.
- Other than filing for bankruptcy, a Consumer Proposal is the only method of settling debt that the government will accept to forgive a portion of your government debts. It’s important to note that settling government debt in this manner will not prevent you accessing government benefits in the future.
- The debts you owe are frozen, so they stop accumulating creditor interest charges. There is also no added interest for doing the Consumer Proposal since no borrowing is needed.
- Your credit score is not a qualifying factor; to do a Consumer Proposal you’ll work with a Licensed Insolvency Trustee, not a lender.
- Licensed Insolvency Trustees are the only legal debt solution providers appointed and endorsed by the Federal government and do not charge added fees for their services. The Consumer Proposal laws set out the costs, and those are paid out of the creditor’s funds.
The double advantage of cutting debt and stopping interest makes the monthly payments in a Consumer Proposal often the lowest among debt management consolidation options.
Difference Between Consumer Proposal and Consolidation Loan Payments – Example
An individual owing $25,000 total between a few credit cards and an overdraft might be looking at a five-year debt repayment plan with options such as these to choose from:
- Payments of $635/month to fully pay back their debt at 18% interest compounded annually.
- Payments of $555/month with a 12% interest consolidation loan.
- Payments of $415/month PLUS program fees and other charges to pay back all their debts using a no-interest credit counselling
- Payments of $125/month with a Consumer Proposal to settle all their debts by repaying just 30% of their total debt (without interest or added service charges).
Try our Debt Options Calculator to see more examples
Consumer Proposals are a highly flexible solution – you can even pay off your proposal early at any time without hassle or penalty – and each Consumer Proposal is tailored specifically to be manageable within an individual’s unique situation.
- Canadians who owe between $1,000 and $250,000 (not including any mortgages on your personal residence) may consider doing a Consumer Proposal to deal with debt.
- If you owe more than $250,000 a different type of proposal could be an alternative to consider.
- If two or more people file a joint Consumer Proposal together (spouses, business partners, etc.) the total debt limit doubles to $500,000.
How Would I Be Involved in my Spouse’s Consumer Proposal?
One of the first things that couples should understand is that although they may share a household and partnership, when it comes to debt each person is their own entity, independent of the other.
Simply put, one spouse is not liable to the other one’s creditors just because they are married or in a common-law relationship. One spouse doing a Consumer Proposal does not change this, nor does it somehow rewrite the responsibility for the debt.
Rather than through marriage, cohabitation, a Consumer Proposal or even bankruptcy, where spouses can become responsible for paying each other’s debts is:
- If they separate and debts become divided as “family debt” under BC’s Family Law Act.
- If they have expressly accepted a joint liability by co-signing, guaranteeing or being a co-cardholder.
- The responsibility to a creditor in this way can happen between spouses or any other party with whom you are taking on debt together (parents/children, friends, business partners, etc.)
Whether you and your spouse hold any joint debt together is something to consider when you’re weighing your options to deal with debt:
- If a couple is in a situation without co-signed / joint debt one spouse can make a Consumer Proposal to consolidate, cut and pay off their debts with no impact to the other spouse.
- The Consumer Proposal process is quite private, and typically only your creditors will be contacted. Because individual debts are so separate between spouses (absent co-signing) it is quite possible to completely resolve debts without involving your partner at all.
In many situations spouses have at least some key debts in common, so it can be advantageous to file a joint Consumer Proposal together to deal with all your combined debts – but it is not a requirement for both partners to do this.
What Happens in a Consumer Proposal When Spouses Have Joint Debt Together?
In situations where spouses have joint / co-signed debt there are several possibilities to consider when it comes to options to deal with debt. For example:
- You might decide it makes the most sense to do a joint Consumer Proposal together to consolidate and manage all your combined debts. Debts you have jointly AND separately would be included.
- If joint debts are minimal but you both have moderate separate debts, then you might each file your own Consumer Proposal that would include the shared and respective separate debts.
There is no requirement for both spouses to take on a formal debt solution, or even to choose the same debt management option. Sometimes a ‘mix and match’ approach works well:
- In some situations only one spouse chooses to do a Consumer Proposal even though there is some joint debt, and in that case the other remains responsible for repaying the full balance of the joint debt – less the amount that creditor receives as part of one spouse’s Consumer Proposal.
- One spouse may decide to do a Consumer Proposal while the other files personal bankruptcy. Or one spouse might file bankruptcy and the other spouse repays the joint debt.
It’s important to understand all your options so you can decide what will work best for your family unit to move forward in dealing with debt. We highly recommend connecting with a Licensed Insolvency Trustee who can talk with you confidentially to help you understand all the pros and cons in detail as they relate to your unique situation.
Understanding How a Consumer Proposal Works
There are many specifics on the ins and outs of Consumer Proposals that are discussed during our confidential consultations, including details of the following common areas of concern:
How Does a Consumer Proposal Affect My Assets?
Since most Consumer Proposals will deal with your debt through monthly payments, usually your assets (and the assets of your spouse) are entirely unaffected by a Consumer Proposal. This also includes assets tied to a secured debt such as a mortgage or financed vehicle.
In Consumer Proposals (and also personal bankruptcy) you can choose to maintain payments to your secured creditors so you can keep the asset, or conversely give up the asset and get out of the contract.
How Does a Consumer Proposal Affect My Income?
Income you, your spouse, or other family members earn during your Consumer Proposal is (respectively) yours, and does not need to be reported to the Trustee in a monthly budget like in a personal bankruptcy.
How Does a Consumer Proposal Affect My Credit?
A Consumer Proposal is noted on the individual’s credit history for only three years after their Consumer Proposal is finished (or six years from the date it started, whichever is soonest). If a debt belongs solely to one spouse (i.e. not a co-signed/joint debt) and they do a Consumer Proposal (or bankruptcy), it has no effect on the other’s credit history or credit score.
- You can apply for new credit any time, and most people are eligible for standard rates/terms on everything from credit cards to mortgages with one or two years of finishing their Consumer Proposal.
Homeownership is a key goal for a lot of people working on paying off their debt – and you can get a mortgage after filing a Consumer Proposal.
- Many people successfully pay off their debts via Consumer Proposal and accumulate an optimal credit history and savings relatively quickly – and with far less cost – than if they continued to try to pay their debts down on their own.
Is There a Risk if Your Partner Has Debt They Don’t Deal With?
Certainly, there can be a potential risk both individually and as a family unit when debts aren’t addressed. For example, in some situations jointly owned or even your spouse’s individual assets can be at risk of creditor actions.
Rather than pose risk, Consumer Proposals (and bankruptcy proceedings) work to keep things like income and assets safe with built-in automatic protection from creditors. These assurances can be very powerful to people who have experienced difficulties or long-term stress before reaching a solution to deal with their debt.
Once your Consumer Proposal is officially filed:
- Your creditors will no longer be allowed to contact you to ask for payments
- Interest charges stop accumulating
- Collection action (calls, letters, court proceedings) must cease
- Wage garnishments, bank account seizures, etc. will be lifted
Even a particularly difficult creditor will not be able to change their mind and opt-out of your Consumer Proposal to pursue you for your debt once your Consumer Proposal has been accepted by the (dollar value) majority.
Although your spouse may not be obligated to pay your debts, oftentimes one of the biggest threats problem debt poses is in the stress that impacts the household and relationships. From overshadowing shared goals to budget imbalance and never-ending worry, debt can have very unwelcome effects.
There is a lot to consider in finding the best way to manage your debt, and it’s common (and very understandable) to feel overwhelmed or unsure about how to approach the situation. Sands & Associates’ caring experts are here to help you and your family navigate the financial challenges you may be facing, so you can move forward together, debt-free. No judgment, just support and solutions!
Your debt-free future is waiting – get started with your debt-free plan today. Book your confidential free debt consultation – virtual and in-person services are available for residents across BC.