Contingent Debt: What It Means and How to Manage It

A Consumer Proposal is commonly used to help an individual to pay off debt accumulated over time, usually to more than one creditor. But often one’s circumstances are not commonplace—giving raise to liability issues which are not as clear cut.

One of our clients, Mr. A, sought my consultation although he was not legally indebted to anyone, but was in the midst of a legal action against him. He advised that he neither had grounds for a defense nor the means to afford legal counsel. Mr. A was confident that it was a matter of time before he would lose the case. More importantly he knew that he would face a liability significant enough for him not to be able to satisfy it.

Mr. A did not have relevant insurance either, which could in some way, protect him. He held a trustworthy position at one of the major banks. The biggest concern Mr. A had was the fact that his employer might receive a wage garnishment notice from the judgment creditor, which would jeopardize his reputation in the eyes of the employer. It would surely put a dent in Mr. A’s income, which was essential to support his family of four.

The issue encountered by Mr. A is identified as a contingent liability. Contingent debt is a claim that may or may not develop into an actual debt depending on the outcome of some future events. These events could vary in nature and are not limited to litigation.

In this case, the contingent liability presented a real concern, since it was determined that the conclusion of the matter was imminent. The important consideration for Mr. A’s situation was that even though he only had one contingent debt, he was eligible to initiate a formal proposal under the Bankruptcy and Insolvency Act before his debt crystallized into a judgment.

The fundamental principle of such a Consumer Proposal is the debtor’s full disclosure of their financial affairs. The Proposal would be cost-effective for Mr. A as the Court supervised settlement of his debt. This course of action would help to eliminate the necessity for both sides to incur further legal costs, and give the plaintiff an opportunity to collect the settled debt without undue delay.

The proposal would guard Mr. A from a potentially damaging garnishment issue. As much as I have established the strategy after interviewing Mr. A, it would be a mistake to think that the ultimate solution to Mr. A’s problem was short and quick.

Only upon collecting further, much needed details from Mr. A and careful review of the documents relevant to the case, was I able to tailor a Proposal which could help him to get out of his financial bind.

There are many other instances where contingent debts may present a standalone dilemma or form only a part of the issues surrounding a person’s financial affairs.

As a licensed insolvency trustee, I am equipped to work with debtors to resolve many types of complicated financial challenges.