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Personal Loan Guarantees & Consumer Proposals

We recently filed a Consumer Proposal (CP) for a gentleman who had a sizable amount of debt, mostly because of his failed business. This man was dealing with a combination of credit card debt, CRA (Canada Revenue Agency) tax and HST debt and a credit union loan taken out through the business he had owned, but which he had personally guaranteed.

At the time of the filing of the Consumer Proposal, he did not believe any of his debt had been guaranteed by a third party. However, after filing his Consumer Proposal he remembered the credit union loan he had arranged had also been guaranteed by a friend. This third-party guarantee had been required by the credit union so the company could qualify for the loan.

He was obviously worried about the impact his filing of the Proposal would have on his friend and spoke with us on a few occasions regarding his friend’s liability. He had originally hoped that by filing a Consumer Proposal, his friend could not be held responsible for the debt. We explained that even though he had filed a Consumer Proposal, and the credit union had voted in favor of his proposal, his friend was still liable for the credit union loan debt he had guaranteed. If we had been aware of the joint guarantee prior to the filing of the Proposal we would have cautioned him about that. Unfortunately, he forgot about the guarantee until the Proposal was already filed and underway.

We 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. We were able to help further by referring a lawyer specializing in debt issues that the friend could use. We also suggested that if his friend were liable for the debt (apparently his friend had the financial means to cover the debt amount), that the friend would take the place of the credit union in the proposal, which provides for an exceedingly high return to creditors. So, in the end, the friend might not be out as much money as my client had initially feared.

The debtor told me his friend met with the lawyer, who had suggested the friend pay out the credit union and take back an assignment of the credit union’s debt, which means the friend became the debtor’s creditor for money paid to the Credit Union. By doing this the friend would be entitled to receive a portion of his payments made under the Consumer Proposal.

For illustrative purposes, let us 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 quite disappointed that he had impacted his friend and his finances in this way but was appreciative there was a way of ensuring his friend was able to get back much of the funds paid to settle the debt. This situation is an excellent example of how a Consumer Proposal can be a solution that offers a fair amount of flexibility while helping to resolve a complex debt situation.

At Farber we are experts at crafting successful Consumer Proposals for our clients. We file thousands of Proposals every year and each one is unique to that clients’ situation and combination of creditors. We can help you, too. Please CLICK BELOW TO ARRANGE A FREE CONSULTATION or give us a call today. We are here to listen – and to help!