What Happens If I Cant Pay My Consumer Proposal Or Consolidation Loan?

Consumer Proposal (“CP”):

First, let’s talk about what it means to default on a CP. Then we can look at what you can or should do if you do, in fact, default

There are certain protections in place that allow for some flexibility in ‘putting it back in the box’ so to speak, if you default. There are two ways of defaulting on your CP payments:

If your CP calls for monthly payments:

1. Most CPs call for regular monthly payments of a fixed amount.
2. If, at any time, you fall behind a total of three monthly payments, your CP will be automatically annulled, meaning that it is no longer in force and your creditors can resume full collection action on the debts you owe to them. For example, let’s say your payments are due on the 15th of each month. If July 16 rolls around and you haven’t paid anything towards your May 15, June 15, and July 15 payments, you’re now three months in arrears and your CP will be automatically annulled as of July 16.

If your CP does not require payments to be made each and every month (e.g., let’s say you’re making a larger payment every two months), your CP will be automatically annulled if you are more than three months late on any single payment. For example, if by August 31, 2016, your payment due May 31, 2016, has not been made (in full), your CP will be automatically annulled.

If you think you’re going to run into problems making any of your payments, get in touch with the Administrator of your CP as soon as possible to get some advice. Depending on what clauses have been included in your CP, it may be possible to delay the due date for your payment.

If you do default and your CP is annulled, it’s still possible, under certain circumstances, to have it “revived”, meaning that it’s brought back into force - you can continue to complete the terms and be relieved of your debts. This involves the Administrator of your CP issuing notice to your creditors that, unless they file an objection with the Administrator within a specified period, your CP will be revived and will again be in full force. A CP can also be revived by Court Order. Either way, you may be expected to bring your payments up to date before the revival will be granted.

Consolidation Loan:

If you default on your consolidation loan payments, the lender can take whatever actions are set out in the loan agreement you signed or under provincial law. Please note that the information below is provided only as a general, informal outline as to what may apply in certain situations. It is not intended to be legal advice and should not be relied on as such.

If you have given collateral for the loan, in most cases, the lender can seize the collateral, sell it and apply the proceeds against what you owe on your loan. The lender will also take collection action against you to recover the amount remaining on the loan. This normally involves demanding payment from you. If you don’t cooperate, the lender may apply to court for a judgment against you, which then allows them to garnish your income (up to 30%) or seize other assets you own. However, in some provinces, there are restrictions on when creditors can do this, if the goods used as collateral for the loan were “consumer goods” (e.g., your furniture, a vehicle which you don’t use for business purposes, etc).

Let’s look at a situation where you are the borrower and you live in British Columbia. You gave “Consumer Goods” as collateral for a loan and you have now gotten behind on your loan payments. The lender can now either seize the collateral and sell it to pay your loan or they can sue you (i.e., ask the court for a judgment against you) for the full amount you still owe on the loan. They cannot do both. For example, if they seize the collateral, they can’t ask you to pay anything more on the loan and they can’t sue you – their act of seizing the collateral means that they have taken that in full satisfaction of the loan. Similarly, if they sue you, they can’t seize the collateral.

What Should You Do if You Know You Can’t Repay the Loan?

If you think you’re going to run into difficulty in making your payments on your consolidation loan, you may want to:

1. Speak with the lender to see if other options are available (e.g., re-write the loan so that you can pay it over a longer-term, thereby reducing your monthly payments). However – and we can’t emphasize this enough - get it in writing. Once you know what the lender is suggesting, you should get some advice from another ‘objective’ party, particularly if you don’t really understand the loan agreement or what the lender is charging you. In these situations (where you, as a borrower are running into difficulty), lenders may try to impose new terms which may make it even more expensive for you than it currently is. Make sure you understand what the overall cost is going to be and how that would compare to a bank loan. Be wary of requests by the lender for you to add more collateral.
2. Speak with a bank or other lender to see if you can get better terms (i.e., apply for a new loan on better terms and use those funds to pay out the consolidation loan).
3. Speak with a Licensed Insolvency Trustee to see if a Consumer Proposal, bankruptcy or other option is a better way to deal with your overall debt situation. In today’s economy, many Canadians are struggling to keep up with debt, often juggling from one payment to the next. If you find yourself in or very close to financial trouble, speak with your local MNP advisor. Working with you, we can take your unique situation into account and help you find a debt solution route that meets your personal financial needs.