Facing financial difficulties can be incredibly stressful, and when a car loan is part of the picture, it adds another layer of complexity. If you're exploring options like a Consumer Proposal in Canada, you're likely wondering what it means for your vehicle, your payments, and your future.

Let's break down how a Consumer Proposal works with your car loan, so you can make informed decisions.

What Exactly is a Consumer Proposal?

A Consumer Proposal is a formal, legally binding offer made through a Licensed Insolvency Trustee (LIT) to your unsecured creditors. It allows you to pay back a portion of what you owe, usually over a period of up to five years, often less than the full amount. It's an alternative to bankruptcy and can help you avoid wage garnishments and stop collection calls.

The key here is 'unsecured creditors'. This distinction is really important when it comes to your car loan.

Car Loans: Secured vs. Unsecured Debt

This is where things get specific. Most car loans are what we call 'secured debt'. This means the loan is tied to an asset - in this case, your car. The vehicle itself acts as collateral. If you stop making payments, the lender has the legal right to repossess the car to recover their money.

Unsecured debts, on the other hand, are not tied to any specific asset. Think credit card debt, lines of credit, or personal loans without collateral. A Consumer Proposal primarily deals with these unsecured debts.

How Does a Consumer Proposal Affect Your Car Loan?

Because your car loan is typically secured, it's not automatically included and discharged in the same way unsecured debts are. You generally have two main paths you can take regarding your vehicle:

• Keep Your Car: If you want to keep your vehicle, you'll need to continue making your regular car loan payments outside of the Consumer Proposal.
• Surrender Your Car: If you can't afford the payments or no longer wish to keep the vehicle, you can choose to surrender it to the lender.

Option 1: Keeping Your Car During a Consumer Proposal

If your car is essential for work, family, or simply part of your daily life, and you can afford the payments, keeping it is often the preferred choice. Here's what that usually involves:

• Continue Payments: You must keep making your regular monthly car loan payments directly to your lender. These payments are not included in your Consumer Proposal.
• Reaffirming the Debt: Your LIT might advise you to sign a 'reaffirmation agreement' or a new loan agreement with your car lender. This formalizes your commitment to continue paying the loan, even though your other debts are being addressed through the proposal. It essentially confirms that you're choosing to honour that specific secured debt.
• Affordability is Key: Before committing, it's crucial to honestly assess if you can truly afford the car payments alongside your Consumer Proposal payments and other living expenses. Your LIT can help you create a realistic budget.

Option 2: Surrendering Your Car

Sometimes, keeping the car just isn't feasible or desirable. Maybe the payments are too high, or the car is unreliable. If you choose to surrender your car:

• Return the Vehicle: You'll arrange with your lender to return the vehicle.
• Deficiency Balance: The lender will then sell the car. If the sale price doesn't cover the outstanding loan amount (plus any selling costs), you'll be left with a 'deficiency balance'. This remaining debt is then considered an unsecured debt.
• Included in Proposal: The good news is that this deficiency balance can be included in your Consumer Proposal. This means you won't be hounded for the remaining amount, as it will be part of the debt you're settling through the proposal.

The Essential Role of a Licensed Insolvency Trustee (LIT)

Navigating a Consumer Proposal, especially with a car loan involved, is complex. This is why a Licensed Insolvency Trustee (LIT) is absolutely critical. An LIT is a federally regulated professional who:

• Will review your entire financial situation, including your car loan and other debts.
• Explains all your options, not just a Consumer Proposal, but also bankruptcy and informal arrangements.
• Helps you understand the implications for your car and other assets.
• Prepares and files all the necessary paperwork.
• Negotiates with your creditors on your behalf.

Impact on Your Credit & Rebuilding After a Consumer Proposal

A Consumer Proposal will impact your credit score. It will be noted on your credit report for three years after you complete all the payments, or six years from the date it was filed, whichever comes first. This means getting a new car loan or other credit during this period can be more challenging, and interest rates might be higher.

However, it's not the end of the road! Many Canadians successfully rebuild their credit after a Consumer Proposal. Here are some tips:

• Budgeting: Stick to a realistic budget.
• Timely Payments: Always make your Consumer Proposal payments on time.
• Secured Credit: Consider a secured credit card once your proposal is filed and you're making payments, as a way to responsibly re-establish credit.
• Future Car Loans: If you need a car after your proposal, demonstrate stability in income and payments. Some lenders specialize in 'subprime' or 'bad credit' car loans, but always compare offers carefully and understand the terms.

Is a Consumer Proposal Right for Your Situation?

Deciding whether a Consumer Proposal is the right path for you, especially with a car loan in the mix, is a very personal decision. It offers a fresh start but comes with consequences, particularly for your credit.

The best first step is always to have an honest, confidential conversation with a Licensed Insolvency Trustee. They can provide tailored advice based on your unique financial picture and help you navigate the process with confidence.