It is not uncommon for us to meet with clients who have a car loan, in addition to unsecured debts like credit cards or lines of credit. In 2022, 65% of our clients had a vehicle at the time of their insolvency filing.
How a car loan is treated in a consumer proposal will depend on decisions you make about the impact your car loan or lease has on your finances. I will explain what happens whether you want to keep your car or walk away from a costly loan or lease.
The key takeaway is that you can keep your car in a consumer proposal unless you choose not to.
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What debts can be included in a consumer proposal?
First, let’s quickly review which debts can be included in a consumer proposal:
- Unsecured personal loans
- Credit cards
- Lines of credit
- Payday loans and other high-interest rapid loans
- Students loans (if you have been out of school for 7 or more years)
- Income tax debts
For the most part, a consumer proposal allows you to eliminate all unsecured debts. Your total debts also cannot exceed $250,000 (excluding mortgage on principal residence).
What happens to a car loan in a consumer proposal?
Debts that cannot be included in a consumer proposal include debts secured by an asset like your car or home. What this means is that you can keep your vehicle, but you must also keep up with your monthly payments. Your secured lender retains all their rights under the loan agreement or lease to repossess your vehicle if you miss payments.
Since a car loan or lease is considered a secured debt, it cannot be included in a consumer proposal. You may consider this good news if you wish to keep your car. If you make your car loan payments on time, a consumer proposal filing will have no effect on your vehicle.
What if you cannot afford your monthly car loan payments?
If your car loan is causing you financial hardship and you are becoming delinquent on loan payments, you may consider handing back your vehicle. Speak to your lender about returning your car and doing a voluntary repossession.
If you find you owe more on your car than you have in equity, you are not alone. About 19% of insolvent Canadians with a vehicle had negative equity in their cars in 2022. On average, they owed a shortfall of $9,348. Luckily a consumer proposal allows you to walk away from a bad car loan arrangement and include any car loan shortfall as an unsecured debt. Effectively, this is how a consumer proposal helps you clear your car loan.
Can you refinance a car loan while in a consumer proposal?
If your car loan payments are too high for your budget, but you don’t want to surrender your vehicle, you may wonder if refinancing the loan is a viable alternative. While you can refinance your auto loan during a consumer proposal, this is not done through the proposal but rather requires the agreement of your car loan lender. Your financing company may not approve your application after you file a consumer proposal because a proposal will cause a temporary hit to your credit report. For this reason, if you want to get a cheaper car or refinance, we recommend making those arrangements before you file your proposal.
And even if your lender is willing to refinance your vehicle, likely by extending your loan term, be aware you will likely pay a higher interest rate. Smaller monthly payments may fit in your budget but you will pay more in interest over time and carry the auto loan for longer than the car may last you. This will only increase the odds of owing negative equity debt and needing a costly loan rollover.
The point of a consumer proposal is to help you eliminate unsecured debts and more importantly build a healthy financial future. Your financial situation will still be at risk if you owe too much on your car, even if you have paid off your other debts. If you really need a vehicle while in a consumer proposal, we suggest doing a voluntary surrender first before you file and look for a more affordable car, with a short loan term (between 3-4 years).
How long after filing a consumer proposal can I get a car?
The amount of time it takes to get a car after you have successfully completed your consumer proposal depends on your financial situation and credit score. To qualify for low interest rates on auto financing, you will need to rebuild a good credit history. Saving a down payment can help with your application, will lower your monthly payments and can allow you to qualify for a lower rate.
There are car loan lenders who specialize in consumer proposal auto loans. Initially you will pay a high interest rate, however a reputable lender will help you manage your loans to lower that rate over time. Speak to your Licensed Insolvency Trustee about options in your area if you need to get a new car loan.
Remember that once you are debt free, you must be mindful of any new debt you take on and ensure that you maintain a low debt-to-income ratio. The last thing you want is to get back into a debt cycle.
As you can see, how you deal with car loan debt in a consumer proposal depends entirely on your finances and how you choose to proceed. If your car payments are unaffordable, we recommend finding a cheaper transportation alternative. Of course, if your car loan is reasonable for your monthly budget, then you can keep your car while eliminating other debts. We know having reliable transportation is important. Always talk with your Licensed Insolvency Trustee about your options.
If your car loan is causing you financial distress or if you have unsecured debts you want to eliminate, speak to a licensed insolvency trustee in a free consultation today and get on the path to debt relief.