When is Filing a Consumer Proposal the Best Option for Dealing with Debt?
Guest Post - Gareth Slocombe, CIRP, CPA-CA, Trustee
Separating spouses may experience debt problems due to numerous reasons:
- Long term stress in a relationship;
- Difficult family situation before and after a separation; and/or
- Credit card and loan debt as a result of split families attempting to meet monthly expenses.
In addition to rising consumer debts, an equalization payment from one spouse to the other may be required as a result of the terms of separation. As discussed in our previous post, some joint debts your spouse has agreed to pay, or has been ordered to pay by the court, are still your debts in the eyes of the lender. As such, you will still be liable for these debts if your spouse defaults. In summary, you may be responsible for multiple debts following a separation. These debts may include joint debts, new debts incurred since separation, or potential debts arising from a default by your ex-spouse.
How to deal with debts following a separation
The first step in managing your debts is developing a realistic budget. This can be challenging for a number of reasons:
- You may have been required to move to a new residence involving new and unforeseen costs including utilities, transportation, childcare expenses etc.;
- Your household income may be substantially lower due to a loss of the income of your spouse that may or may not be made up for through maintenance or child support payments; and/or
- You may now be required to pay maintenance and child support to your ex-spouse and have limited funds remaining to manage your own debts and ongoing living expenses.
Even with a realistic budget, it may not be possible to consistently meet your financial obligations. While options such as consolidation loans may seem appealing, they are often just stopgap measures that do not sufficiently address the fact that outstanding debts are too high to manage. Ad hoc settlement agreements with creditors are also often unworkable since you must make lump sum settlement payments and deal with all creditors individually.
Filing a Consumer Proposal
Filing a consumer proposal is often a viable solution to many types of debt problems and has many advantages over other solutions. To file a consumer proposal, you will first need assistance from a Licensed Insolvency Trustee. Although circumstances can vary considerably, filing a consumer proposal is usually most appropriate for debtors who:
- Owe less than $250,000 (excluding a home mortgage);
- Cannot repay loans in full; and
- Have a stable source of income.
The trustee will help you develop a plan that can substantially reduce your outstanding unsecured debt by more than 80% and consolidate payments into one interest- free monthly payment that you can manage. One of the major benefits of a consumer proposal is that once you file, all collection efforts against you, including garnishments, stop immediately. You will need only 51% of your creditors (calculated by dollar value) voting in favour of the proposal in order for it to be accepted and legally binding on all your unsecured creditors.
Benefits of a consumer proposal as a debt solution
In the context of a spousal separation, a consumer proposal has a number of benefits as a debt solution:
- It will eliminate potential liability for joint debt obligations that your ex-spouse has agreed to take over but which he/she could default on in future.
- It can include a debt owed by you as an equalization payment to your ex-spouse.
- It can reduce your overall debts such that your future support and maintenance payments (which cannot be included in the proposal) become more manageable. This can ultimately benefit both you and your ex-spouse.
In many cases, it makes sense for both spouses to file separate consumer proposals to deal with their debts. However, it may be beneficial to file a joint consumer proposal if a majority of the debts to be compromised are owed jointly by you and your spouse and a workable agreement between you can be reached as to how much of the monthly proposal payment each of you will make. There are many scenarios in which a consumer proposal filing may be the best option, however matters involving separating spouses can be complicated. It is important to contact a Licensed Insolvency Trustee to assess your debt situation and to advise you of your options. *Gareth Slocombe is a member of the Canadian Association of Insolvency and Restructuring Professionals. He is a Licensed Insolvency Trustee and a Chartered Professional Accountant. You can learn more about Gareth and the services he provides by visiting his website at debthelpbc.ca.