If your debts are causing you financial distress, you may have considered filing a consumer proposal as a possible solution. Depending on how much you owe and the amount of income you earn, this may be a wise move, as a consumer proposal offers many benefits.
Like many Canadians, your total liabilities may include a car loan, and you may be wondering whether or not you can add this debt to your proposal.
The simple answer is you cannot include a car loan in a consumer proposal unless you surrender the car to the secured creditor. However, filing a proposal will reduce your overall debt burden, allowing you to better manage your car loan payments.
In this article, we’ll explore the implications of filing a consumer proposal if you have a car loan and how to effectively deal with this type of debt to boost your financial standing.
How are car loans treated in a consumer proposal?
A consumer proposal is a federal government debt relief program that allows you to repay a portion of your debts rather than the entire balance. However, not all debts are treated equally under a consumer proposal – some qualify while others don’t.
You may only include unsecured debts in your proposal. Some examples are credit cards, lines of credit, income tax debt, payday loans, and some types of student loans.
Unsecured debts are those not backed by an asset, which means there’s no item that a lender can seize from you to pay off the balance should you default.
A car loan is a secured loan, as your vehicle functions as collateral for your lender. As a result, you’re not allowed to include it in a consumer proposal alongside your unsecured debts.
Should you decide to file a consumer proposal, you’ll continue to be responsible for making your monthly auto loan payments. Your loan contract will remain intact as you proceed through your proposal.
If you fall behind on your payments, your lender can repossess your vehicle and sell it to cover the remaining loan balance.
However, there is one scenario where you can legally add a portion of your auto loan to your consumer proposal.
Let’s assume that your lender repossesses your vehicle after you’ve missed several payment deadlines. However, they sell it at a loss, meaning there’s enough money to cover the loan balance. In that case, you’re liable for paying the shortfall.
However, since there’s no more asset backing the remaining balance, the loan automatically turns into an unsecured debt. As a result, it’s now eligible for discharge through a consumer proposal like any other unsecured loan.
This type of scenario could occur if you financed the purchase of a new car, especially a pricey luxury brand. Depending on the make and model of your vehicle, its value can plummet rapidly, leaving you with negative equity (sometimes called an “underwater” or “upside down” car loan).
How a consumer proposal can help you manage your car loan payments
While a consumer proposal won’t absolve you from your car loan payments, it will lighten your unsecured debt load. As a result, you’ll have extra money on hand to apply toward your car loan, minimizing the chance of missed payments.
In addition, a consumer proposal only requires you to make fixed monthly payments to your unsecured creditors over five years. Never, under any circumstances, will you need to surrender your assets to settle your debt, including your vehicle.
Learn more about how debt you could eliminate using our consumer proposal calculator.
Can you get a new car loan after filing a consumer proposal?
Suppose you’ve surrendered your vehicle to your lender and subsequently filed a consumer proposal. Can you still get approved for a new car loan while your proposal is in effect?
The answer is “yes.” However, remember that a consumer proposal will cause a temporary dip in your credit score. As a result, lenders will be more hesitant to extend credit to you.
You’ll face stricter loan qualification requirements and higher interest rates. You may also need to find a co-signer to qualify for a car loan at an affordable interest rate.
To secure the best car loan rates and terms, you’ll need to work diligently to rebuild your credit and maintain a steady income and reasonable debt-to-income ratio.
But what if you need to finance a vehicle as soon as possible? In that case, you can apply for a loan in the alternative lending market. Some auto financing companies specialize in lending to those enrolled in or who have completed consumer proposals. Their qualification criteria are less stringent than traditional lenders, and they’ll be more willing to offer you a reasonable interest rate.
What can you do if you can’t keep up with your car loan payments?
If you’re struggling to repay your car loan, there are several solutions you can explore for financial relief. Your ideal option will depend primarily on whether you wish to keep your car and the flexibility of your lender regarding the terms of your loan contract.
Refinance or renegotiate your loan terms
If you don’t want to surrender your vehicle, you can speak with your lender and see if you can refinance your loan at a more favourable rate. Or you can negotiate a new payment plan. However, getting a lower rate or loan extension may be challenging if you’re credit has worsened since you first obtained your loan.
Transfer your loan to someone else
This is a viable option if you can find a friend or family member willing to assume responsibility for your loan. Given the increased risk, not all lenders will agree to this arrangement, so contact your car loan provider and ask if they allow auto loan transfers. Not surprisingly, lenders who permit loan transfers will require the new borrower to have excellent credit and a reliable income.
Sell or trade in your vehicle
Sometimes, selling your car is the best option to reduce the stress on your budget. You can use the sale proceeds to pay off your loan.
If you require a vehicle, consider trading in your current one for a cheaper alternative. You can use the money you receive from the trade-in to cover your car loan. If there’s any leftover, you can apply it as a down payment for a new car.
Voluntary repossession. In some cases, voluntary repossession is the most effective option to escape a burdensome auto loan. Unfortunately, since it’s essentially a loan default, it will impair your credit score significantly.
If you’re considering surrendering your vehicle to your lender, ensure you do it before you file a consumer proposal. In doing so, you can legally include the loan shortfall with your other unsecured debts in your filing. You cannot return your vehicle after your proposal is underway and retroactively add the loan shortfall to the agreement.
Final thoughts on car loans and consumer proposals
If you’re contemplating filing a consumer proposal, determine whether you can afford to continue making your car loan payments first.
Since a consumer proposal will lower your unsecured debt commitments, you’ll have an easier time managing your car loan payments.
But that’s not the case for everyone. If you’ve exhausted all your options and anticipate defaulting on your auto loan, it’s best to arrange a voluntary repossession before filing your proposal.
Once your lender sells your vehicle, they’ll use the proceeds to cover the balance owed. As discussed previously, if the funds received from the sale are insufficient to retire your loan, you’re financially liable for the shortfall. But, at this point, you can add the leftover balance to your consumer proposal as it’s now an unsecured debt.
If your car loan and other unsecured debts are straining your bank account, contact a Licensed Insolvency Trustee (LIT) to explore whether a consumer proposal is your best option to get the financial relief you need.
An LIT can help you determine how much debt you can eliminate and the impact filing a proposal will have on your car loan. If you can discharge a substantial portion of what you owe, you’ll free up enough cash in your budget to stay current with your car loan.
At David Sklar & Associates, we’ve been helping people across Ontario free themselves from crippling debt payments for over 20 years using consumer proposals. Contact us today for a free, no-obligation consultation to learn how this debt relief program can set you on the path to financial recovery.
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