Deciding to file a consumer proposal is a significant and often difficult choice, especially for couples. It can create tension in a relationship, and many worry about the potential negative impact on their partner's credit. Given the intertwined nature of finances in marriages or common-law relationships, these concerns are understandable. This article explores whether filing a consumer proposal can adversely affect the financial stability of the other spouse.
How Does a Consumer Proposal Work?
A consumer proposal is a legally binding debt settlement agreement facilitated by a Licensed Insolvency Trustee (LIT). It allows you to negotiate with creditors to repay a portion of your unsecured debts over a set period, usually up to five years. Unsecured debts include credit card balances, personal loans, and lines of credit.
Key benefits of a consumer proposal include:
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Reduced Debt: You can reduce your total unsecured debt by up to 80%.
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Lower Monthly Payments: With less debt to repay, your monthly payments become more manageable.
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Stay of Proceedings: Filing a consumer proposal stops creditors from pursuing collection actions, giving you time to reorganize your finances.
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Halts Wage Garnishment: It immediately stops wage garnishment.
Only an LIT can file a consumer proposal on your behalf. LITs are federally regulated in Canada, ensuring they adhere to strict ethical and legal standards while providing expert guidance.
Indirect Effects of Consumer Proposals on Spouses
Before filing a consumer proposal, an LIT will assess your financial situation, including factors related to your spouse.
High-Value Assets
If you and your spouse jointly own high-value assets, such as a home, this could increase the monthly payments required under the proposal. However, assets solely owned by your spouse are not considered.
Spouse’s Income
If your spouse has a high income, creditors may expect higher monthly payments, as the household’s overall financial capacity is taken into account.
Does a Consumer Proposal Automatically Affect Your Spouse?
Filing a consumer proposal does not automatically impact your spouse. If the debts included in the proposal are solely in your name, you are the only one responsible for repayment. While your credit rating will drop to an R7, your spouse’s credit score and ability to access credit will remain unaffected.
Your spouse is not obligated to contribute to the payments, though they may choose to help if they wish. However, joint debts are an exception.
What Is Joint Debt?
Joint debt refers to financial obligations shared by two or more people, such as spouses, who are equally responsible for repayment. For example, a joint credit card means both spouses are liable for the balance, regardless of who made the purchases.
Joint Bank Accounts
Many couples combine their finances in joint bank accounts, which can complicate matters when one spouse files a consumer proposal. If only one spouse is filing, it’s advisable to close the joint account and open separate individual accounts at a different bank before proceeding. This ensures the non-filing spouse has access to funds unaffected by the proposal.
Can Joint Debt Be Included in a Consumer Proposal?
Yes, unsecured joint debts can be included in a consumer proposal. While your spouse’s credit rating won’t be affected as long as payments are maintained, their legal obligation to repay the debt remains. However, their responsibility for the debt decreases as you make payments under the proposal.
Can You File a Consumer Proposal Jointly?
Filing a joint consumer proposal is an option, but it’s not always the best choice. If you and your spouse share a significant amount of joint debt, a joint proposal might be suitable.
Pros of a Joint Proposal
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Both spouses receive the legal protections of a consumer proposal
- A joint proposal can include up to $500,000 of debt (excluding mortgages on a primary residence), compared to $250,000 for an individual proposal.
Cons of a Joint Proposal
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Both spouses’ credit ratings will be affected.
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Access to credit may be limited for both parties.
If you don’t have substantial joint debt, filing individually may be more practical, ensuring one spouse retains access to credit.
Should You File Alone or Jointly?
If you’re unsure whether to file individually or jointly, consult an LIT. They can evaluate your financial situation and explain the advantages and disadvantages of each option, helping you make an informed decision.
