Will I lose my car if I file a consumer proposal or bankruptcy? How vehicles are treated in each

For many people, the car is the one asset they cannot easily do without, since it is how they get to work. So the question comes up early: what happens to my car if I file a consumer proposal or bankruptcy? In general, you can often keep a vehicle in a consumer proposal if you keep up the car loan payments. In a bankruptcy the answer depends more on the loan, the car’s value and your province’s exemption rules. The details matter, so here is how each option generally works.

What happens to my car in a consumer proposal?

A consumer proposal is a legally binding offer, made through a Licensed Insolvency Trustee (LIT), to pay your unsecured creditors part of what you owe, to stretch out the time to pay, or both. The term can’t be longer than five years.¹

The Office of the Superintendent of Bankruptcy (OSB) says that if your proposal is accepted, you keep your assets, “provided you make your payments to your secured creditors.”¹ A car loan is a secured debt: the lender has a claim on the vehicle. So the proposal deals with debts like credit cards and unsecured lines of credit, while the car loan generally carries on as before, and you keep paying it.

That is the main trade-off to weigh. A proposal can lower or stretch out your unsecured payments, but it won’t shrink a car loan, so your monthly budget still has to cover both.

What happens to my car in a bankruptcy?

According to the OSB, a bankruptcy typically leaves a secured creditor’s rights where they were.² If a lender holds valid security over your car, the OSB suggests talking to your LIT, and notes that when the payments are affordable, an arrangement with that lender may be possible.²

There is a second part to the answer. In a bankruptcy, the LIT sells your assets, apart from those exempted by provincial and federal laws.² Whether a particular vehicle is exempt, and up to what value, depends on where you live. Exemptions are set by each province, so two people with similar cars in different provinces could be treated differently. A car with a lot of equity is more likely to be affected than an older one that is worth little or mostly owed to the lender. An LIT can tell you how this applies to your province and your vehicle.

Can the lender repossess my car after I file?

The stay of proceedings is the legal pause on collection that starts when you file. The OSB explains that it generally stops collection actions for unsecured debts included in your filing, but in most cases it does not reach secured debts such as a car loan.³ In other words, falling behind on car payments can still put the vehicle at risk, even while a proposal or bankruptcy is under way. A creditor can also ask the court to lift the stay in some circumstances.³

If you miss three monthly payments on a proposal, it is deemed annulled and creditors can resume collection unless a court has ordered otherwise or an amendment has been filed.¹

What about my credit and getting another car loan?

The OSB says a person who files a bankruptcy or consumer proposal is generally assigned the lowest possible credit score. A proposal stays on your credit report for its term plus a few years, depending on your province, and the OSB adds that “no one is required to give you credit.”¹ If you take on a new car loan later, compare interest rates and the total cost before signing.

If you’re worried about the whole picture, you’re not alone: see who files for insolvency, according to the OSB’s debtor profile, and the latest monthly filing numbers.

What this means for you

• List what you owe on the car and what it’s worth. If you owe more than the car is worth, tell your LIT, since it changes the options.
• Check your province’s exemptions. They determine how a vehicle is treated in a bankruptcy.
• Don’t fall behind on the car loan while you decide. Secured lenders are generally not held back by a stay.
• Ask a Licensed Insolvency Trustee. Many offer a free first consultation. You can also read how car loans and debt relief options fit together before you go.

This is general information, not advice for your situation.