A common concern is how cosigned debts are treated when one person files a consumer proposal. When someone files a consumer proposal, they make a deal with their unsecured creditors to repay a percentage of what they owe. What happens to the rest of the cosigned debt and is a consumer proposal the right option?
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What does cosigned mean?
When you co-sign a loan, both you and the borrower sign the loan agreement. As cosigner, you agree to repay the loan if the borrower can’t.
Joint liability does not arise because of your relationship with a person. You don’t automatically become liable for someone’s debts just because you get married or because someone dies. The only way to become jointly responsible for a debt is to cosign or guarantee a loan in writing.
If you’ve cosigned a loan, you are jointly & severally liable for the full amount of the debt. What this means for the cosigner when someone files a consumer proposal is that, while part of the debt is being paid via the proposal, the joint party is still responsible for the remainder of the debt.
Many people ask if they can “exclude” a joint debt from a consumer proposal so that the other cosigner is not stuck with the debt. Unfortunately, that is not an option within the laws regarding consumer proposals. In a proposal, all unsecured creditors must be treated equally even if there are joint debts.
How to deal with cosigned debt in different scenarios
So how should you proceed if you have joint or co-signed debts and are considering filing a consumer proposal? We look at some common situations.
What if a couple has large debts, both individual debts and joint debts?
If both spouses have debts they can’t pay, some in each name individually as well as significant joint debt, they can file a joint consumer proposal. Making one combined proposal to all their creditors is both easier, often less costly, than filing separately.
What if one spouse does not have much debt other than the joint debt?
If the cosigning spouse does not have a debt problem of their own, then the borrower can file a consumer proposal to eliminate their obligation to pay debts they owe, leaving the spouse to repay the portion of the cosigned debt forgiven in the proposal. This is a good way to leave one spouse with a good credit rating while working to eliminate overwhelming debts of the other spouse.
What if a couple separates or divorces when joint debts are still outstanding?
I’m often told that one spouse agreed to “take the joint debt” through a separation agreement. That’s all well and good if the debt is getting paid, but the separation agreement does not change the original agreement with the lender. The lender can still go after the both ex-spouses if the debt is not getting paid in full. When I encounter this situation, I ask about how the relationship is working after the separation. In cases where the separated or divorced couple has regular communication and an appropriate level of trust, it is possible to file a joint consumer proposal so that both parties are protected. Being married is not a requirement of doing a joint proposal.
What if my parent cosigned my student line of credit or other loans?
If, as the child/debtor, most of your debts have been cosigned by your parents, it may not make sense to file a consumer proposal or even bankruptcy. Since your parents will be called upon to repay the loan anyway, it may make sense to work with them to repay the loan together. If you have significant other debts, then it still may make sense to file a proposal or bankruptcy to get rid of those debts.
If you are the parent/debtor and you have cosigned a loan for your child, you may now worry about hurting your child’s credit rating if you file a proposal. In most cases, the child is already making the payments. If the parent files a consumer proposal, the child would continue with the payments, and their credit is only hurt if they fall behind on the payments.
As you can see, deciding on the right course of action when you are struggling to repay cosigned debt can be complicated. The first step is to book a free, confidential consultation with a Licensed Insolvency Trustee so we can review your situation and provide you with the best advice on how to proceed.