I recently filed a Consumer Proposal (CP) for a gentleman who had a lot of debt, mostly due to his failed business. This man was dealing with a combination of credit card debt, government tax debt, and a credit union loan taken out by the business he owned, but personally guaranteed. At the time of filing the Consumer Proposal, he didn’t believe any of his debt had been guaranteed by a third party. However, subsequent to filing he learned that the credit union loan had also been guaranteed by a friend. This third party guarantee was required by the credit union in order for the company to qualify for the loan.
He was obviously worried about the impact on his friend and spoke with me on a few occasions regarding his friend’s liability. He was hopeful that by filing a Consumer Proposal, his friend could not be held responsible for the debt. I explained that even though he had filed a Consumer Proposal, and the credit union had voted in favour of his proposal, his friend was still liable for the credit union loan debt he had guaranteed.
I recommended that his friend consult with a lawyer to see if there were any legal grounds on which to challenge the enforceability of the guarantee. I was able to help further by referring a debt lawyer that the friend could use. I also suggested that if the friend was ultimately liable to pay the debt (apparently he had the financial means to do so), that the friend would take the place of the credit union in the proposal, which provides for a very high return to creditors. So in the end, the friend might not be out as much money as initially feared.
The debtor told me his friend met with the lawyer who suggested that the friend pay out the credit union and take back an assignment of the credit union’s debt, which basically means the friend became the debtor’s creditor for the amount of money paid to the Credit Union. By doing this the friend would be entitled to receive the payments made under the Consumer Proposal.
For illustrative purposes, let’s assume that the guarantee was for $10,000 and the Consumer Proposal was paying 50 cents on the dollar. The friend would pay the Credit Union $10,000 and in turn have the right to receive $5,000 paid out on the Proposal, thus leaving him short $5,000.
The debtor was ultimately disappointed he impacted his friend in this way, but was appreciative there was a means to ensuring his friend got back the majority of the funds paid to settle the debt. This case is a good example of how a Consumer Proposal can be a solution that offers a bit of flexibility which helps to resolve a complex debt situation.