If you’re considering filing a consumer proposal to deal with debt that’s too much to handle, a contributing factor in your decision may be how doing so will affect your spouse. Will their credit score get tarnished? Would their financial obligations change? Will they still get bombarded with collection calls from creditors?
In this article, we’ll explore the consequences, if any, that filing a consumer proposal will have on your spouse. We’ll also outline when it makes sense to pursue this debt relief solution and when to explore other options.
How does a consumer proposal affect my spouse?
Being married or in a common-law relationship does not mean your spouse is automatically responsible for your debts and vice versa. If you take out a loan independently and sign your name on the contract, it’s your job to repay the money. Should you make a late payment, your credit score will take a hit, while your spouse’s score will remain unchanged. If you default on your payments, the lender can take legal action only against you to recover the funds, never your spouse.
The same concept applies to a consumer proposal. It’s a legally binding debt repayment agreement between you and your creditors. Therefore, filing a consumer proposal won’t affect your spouse’s credit report, nor will it require them to make payments on either your original debts or those negotiated under your proposal. Your spouse would only be obligated to make payments when you have joint debt.
How joint debt is dealt with in a consumer proposal
If you have joint debt, your spouse will remain responsible for paying the entire balance while you’re in a consumer proposal.
Joint debt is money that you borrow with your spouse. In other words, you both sign the loan contract, sharing an equal commitment to repay the principal and interest. You can hold a wide range of secured and unsecured debts jointly with your spouse. Some common ones include credit cards, lines of credit, bank overdrafts, mortgages, and car loans.
Suppose your spouse is a joint borrower, co-signer, or guarantor. In that case, the lender can legally pursue them for payment using all the available tools: collection calls, lawsuits, bank account freezes, etc. These actions can continue even after a separation or divorce. Any late payments made on the outstanding debt will negatively impact their credit, too.
What if you include joint debts in your consumer proposal? In this scenario, the legal obligations of your spouse to repay the debt remains, less whatever your creditor receives from the monthly payments you make under your proposal.
Before filing a consumer proposal, confirm whether your spouse is listed as a co-signer, co-borrower, or guarantor on the debts you wish to include. Otherwise, they’ll be on the hook for the balance owing and at the mercy of creditors and their collection efforts.
It’s worth reiterating that the consumer proposal itself won’t appear on your spouse’s credit report, even for jointly held debt. The reason is that you filed the proposal, not your spouse.
How your spouse is involved in the consumer proposal process
Before administering a consumer proposal, your Licensed Insolvency Trustee will assess your financial situation, including your income, assets, and expenses. The purpose is to determine whether a consumer proposal is the ideal path forward and how much of your existing debts you can afford to repay. Your offer amount must be fair and reasonable based on your net worth and earnings. Otherwise, your creditors may reject your proposal, especially if they believe they can receive more if you file bankruptcy.
However, it’s not only your personal assets and income that your trustee includes in their evaluation. Joint assets you own with your spouse and the income they earn also play a role.
The impact of joint assets
The higher the value of your assets, the larger the monthly payments you can anticipate under your consumer proposal.
To determine your net worth, your trustee will tally up the value of your personal assets, less the value of any debt obligations secured against them. Second, they’ll add half the total value of joint assets you hold with your spouse. Some examples include a joint bank account and the marital home.
Assets that your spouse owns solely don’t enter into the equation.
The impact of your spouse’s income
The higher your spouse’s income, the larger the percentage of your debts your creditors will demand you repay under your proposal. The reason is that your household can afford to pay more.
Your Licensed Insolvency Trustee will factor in your spouse’s income to determine whether your household earnings exceed the surplus income limit. This threshold represents (determined annually by the federal government) the income a typical family would need to maintain a reasonable standard of living.
Filing a joint consumer proposal with your spouse: when it makes sense
Do you and your spouse owe a sizable amount of debt (most jointly held) and struggle to make payments? If so, it may be preferable to file a joint consumer proposal.
Under this arrangement, you and your spouse will benefit from the legal protections that a consumer proposal provides. After coming to a debt settlement agreement with your lenders, you can work together to pay down your remaining debts and start fresh together.
Filing a joint consumer proposal will also reduce the administrative costs (you’ll pay the fees once instead of twice) of carrying out the proposal. As a result, a larger percentage of each payment will go towards paying off your creditors. In addition, a joint proposal will increase the value of debts you can include from $250,000 to $500,000.
Of course, filing a joint proposal will harm your spouse’s credit rating and your own. As a result, both of you will experience difficulty getting approved for loans for a period of time.
If your spouse has relatively few personal debt obligations, you’re likely better off filing a consumer proposal alone. In this case, you’ll reduce a significant portion of your household debt, and your spouse’s credit score will remain unscathed.
Our final thoughts on the impact a consumer proposal has on your spouse
Filing a consumer proposal won’t affect your spouse’s credit score, nor will it place any obligations on them to pay your existing debts or make proposal payments. However, they’re still accountable for the outstanding balance on any joint debt. This means creditors can still hound them for payment and pursue legal tactics to recover the money owed.
If your household is grappling with overwhelming debts, there are different ways to reach a solution. You can file a consumer proposal independently or jointly with your spouse. Or, one of you could pursue a proposal while the other files bankruptcy. The optimal course of action will vary based on your specific circumstances.
If you’re unsure how to proceed, reach out to a Licensed Insolvency Trustee to discuss your options. They can review your financial challenges and recommend the best strategy to free your household from crushing debts for good.
Photo by Timur Weber