Car Loans and Consumer Proposals: Can You Include Your Car and Still Keep It?

Introduction

Facing overwhelming debt is stressful enough without worrying about whether you’ll lose your car. For many Canadians, a vehicle isn’t optional; it’s how you get to work, take your kids to school, or manage daily life. So when you start exploring a consumer proposal, one of the first questions that comes up is: “What happens to my car?”

The good news is that consumer proposals treat different types of debt differently. While unsecured debts (like credit cards or lines of credit) can be reduced through a proposal, secured debts, including most car loans, follow a different set of rules.

And here’s the part most people don’t realize: in many cases, you can keep your car while filing a consumer proposal, even if you’re struggling with other debts. The key is understanding how secured car loans work, what lenders can and can’t do, and what options you have depending on your financial situation.

This article breaks down everything you need to know, including when you can keep your vehicle, when surrendering it might make sense, and how a Licensed Insolvency Trustee can help you choose the right path.

Secured vs. Unsecured Debt in Consumer Proposals

To understand how your car loan fits into a consumer proposal, it helps to know the difference between secured and unsecured debt.

Unsecured debt includes things like credit cards, personal loans, payday loans, and tax debt. These debts have no collateral attached, which means they can be reduced or eliminated through a consumer proposal.

Secured debt, on the other hand, is tied to an asset. A car loan is almost always secured. The vehicle itself is the collateral. If you stop making payments, the lender has the right to repossess the car.

Because of this, secured debts are not automatically included in the debt reduction portion of a consumer proposal. You can still file a proposal, but the secured lender’s rights remain intact.

This means:

• You can keep the car if you continue making payments
• You can choose to surrender the vehicle
• Any remaining balance after surrender (called a deficiency) can be included in your proposal

Understanding this distinction is the foundation for making the right decision about your vehicle.

How Car Loans Are Treated in Consumer Proposals

The Basics of Car Loans in Proposals

Because car loans are secured, they sit outside the debt reduction portion of your proposal. Your lender keeps their rights to the vehicle, and you keep the responsibility to maintain payments if you want to keep the car.

Options for Your Vehicle When Filing

Most Canadians have three main options:

1. Keep the car and continue payments If your payments are up to date and affordable, this is the simplest path. The proposal does not change your car loan terms.
2. Surrender the vehicle If the payments are too high or the car isn’t worth keeping, you can return it to the lender. Any remaining balance after the car is sold (the deficiency) becomes unsecured debt and can be included in your proposal.
3. Refinance in certain situations Some lenders may allow refinancing to lower payments, but this depends on your credit and the lender’s policies.

What Lenders Can and Cannot Do

A lender cannot repossess your car just because you filed a consumer proposal. As long as you continue making payments, you can keep the vehicle.

They can repossess if:

• You fall behind on payments
• Your insurance lapses
• You violate the loan agreement

Your Licensed Insolvency Trustee will notify the lender about your proposal and help manage communication.

When You Can Keep Your Car in a Consumer Proposal

You can usually keep your vehicle if:

1. You’re current on payments

If you’re up to date, lenders typically have no reason to repossess.

2. You can afford the ongoing payments

Your Trustee will help you build a budget to ensure the payments fit within your proposal plan.

3. The vehicle has little or no equity

Most financed vehicles have little equity, especially early in the loan. If the lender is fully secured, they’re generally satisfied as long as payments continue.

4. The car is essential for work or family needs

Trustees understand that a vehicle is often necessary for income and daily life. They will help you structure your proposal so you can keep it.

In many cases, keeping your car is not only possible, it’s the most practical option.

When You Might Need to Surrender Your Vehicle

There are situations where surrendering the car may be the better financial choice:

Unaffordable payments

If the monthly payment is too high, keeping the car may strain your budget even after filing a proposal.

Significant negative equity

If you owe far more than the car is worth, surrendering may help you reset financially.

Mechanical issues

If the car needs expensive repairs, it may not be worth keeping.

How surrender works

You return the vehicle to the lender. They sell it, apply the sale amount to your loan, and calculate the remaining balance. That remaining balance, the deficiency, becomes unsecured debt and can be included in your consumer proposal.

This can significantly reduce what you owe and help you move forward with a more manageable financial plan.

Special Situations

Lease Agreements vs. Financed Vehicles

Leases and loans are treated differently:

• Leased vehicles: You can usually keep the lease if payments are current. If you return the vehicle early, any penalties or shortfall become unsecured debt and can be included in your proposal.
• Financed vehicles: You must continue payments to keep the car. If you surrender it, the deficiency becomes unsecured.

Co‑Signed Car Loans

If someone co‑signed your car loan:

• They remain responsible for the loan even if you file a proposal
• The lender may pursue the co‑signer if payments stop
• You can still keep the car if payments continue
• If you surrender the vehicle, the deficiency can be included in your proposal, but the co‑signer may still be liable unless they also file

Your Trustee will help you understand how your proposal affects co‑signers and what options you have.

Conclusion

For most Canadians, keeping a vehicle during a consumer proposal is absolutely possible and often the best choice for maintaining stability while rebuilding your finances. Whether you keep the car, surrender it, or explore refinancing, the key is understanding your options and getting expert guidance.

A Licensed Insolvency Trustee can help you review your car loan, assess your budget, and choose the path that protects both your transportation and your financial future. Book a free consultation today to learn about your options.