Seize or Sue Laws in BC: What You Need to Know Before You Guarantee or Co-Sign Anything

Many individuals have co-signed loans or guaranteed debts for friends or family members, often without fully understanding the legal and financial consequences. These commitments can carry significant risks, and it is essential to be informed before signing any financial agreements.

Co-Signing a Loan

Co-signing a loan means that you are equally responsible for repaying the debt as the primary borrower. If the borrower defaults on the loan, the lender can demand full payment from you. Additionally:

• Your credit score will be affected by missed payments, even if you are unaware of them.
• Your borrowing capacity is reduced since lenders consider co-signed loans as part of your financial obligations.
• The lender does not have to pursue the primary borrower first; they can come directly to you for repayment.

Before co-signing a loan, ask yourself:

• Can I afford to take on this debt if the borrower defaults?
• Am I comfortable with the risk to my credit score and financial stability?

Guaranteeing a Loan

Guaranteeing a loan is different from co-signing. While a co-signer is immediately responsible for the loan, a guarantor is only liable after the lender has attempted to collect from the primary borrower. However, once the lender deems the borrower unable to pay, they can demand full payment from the guarantor. If you are considering guaranteeing a loan:

• Limit the guarantee amount and duration in writing.
• Ensure you receive updates from the lender on the borrower’s payment status.

Loan for Consumer Good (often seen for Vehicle Loans) and the Seize or Sue Rule in BC

British Columbia’s Personal Property Security Act (PPSA) includes consumer-friendly provisions under the Seize or Sue rule, which applies to vehicle financing and other purchases of consumer goods. These rules provide important protections for consumer borrowers and co-signers.

How the Seize or Sue Rule Works

If a vehicle loan goes into default, the lender has two options but cannot pursue both:

1. Seize the vehicle – If the lender repossesses the vehicle, they forfeit the right to sue for any shortfall if the sale of the vehicle does not cover the remaining loan balance.
2. Sue for the outstanding loan amount – If the lender chooses to sue instead of seizing the vehicle, you keep the vehicle, but you remain responsible for paying off the remaining debt.

Application to Co-Signers and Guarantors

The implications of the “Seize or Sue” rule differ notably between co-signers and guarantors:

• Co-Signers: As co-signers are jointly and severally liable for the debt alongside the primary borrower, the “Seize or Sue” provisions apply directly to them. If a creditor elects to seize the collateral (e.g., a vehicle), the co-signer’s obligation for any remaining debt is extinguished. Conversely, if the creditor opts to sue for the debt, the co-signer remains liable, but the creditor must relinquish any claim to the collateral.
  
  
• Guarantors: Guarantors, who promise to fulfill the debt obligations if the primary borrower defaults, are not directly protected by the “Seize or Sue” provisions. According to legal interpretations, if a creditor seizes the collateral, the primary borrower’s obligation is extinguished; however, the guarantor’s liability may persist unless explicitly stated otherwise in the guarantee agreement.

Case Law Insights

While specific British Columbia case law directly addressing the application of “Seize or Sue” provisions to guarantors is limited, legal analyses suggest that the PPSA’s “Seize or Sue” rule primarily protects debtors and co-signers. Guarantors may still be pursued for any remaining debt even after the collateral has been seized, depending on the terms of the guaranteed agreement.

Leasing a Vehicle vs. Financing a Purchase

The Seize or Sue rule does not apply to leases. If you lease a vehicle and stop making payments:

• The leasing company can seize the vehicle and still sue you for any unpaid lease amounts or early termination penalties.
• Voluntarily surrendering a leased vehicle does not eliminate your obligation to pay the remaining balance.

Voluntary Surrender and Its Risks

If you voluntarily surrender your financed vehicle, it may not be considered a “seizure” under BC law, meaning the lender could still pursue you for any outstanding loan balance after selling the vehicle. Always seek legal advice before voluntarily surrendering a vehicle.

What Happens to These Debts in a Bankruptcy or Consumer Proposal?

If you are struggling with vehicle debt, a Consumer Proposal or Bankruptcy can provide relief:

• Keeping Your Vehicle: If your loan payments are current and you wish to keep the vehicle, you may continue making payments while eliminating other unsecured debts through a Consumer Proposal or Bankruptcy.
  
  
• Surrendering the Vehicle: If you choose to give up the vehicle, any remaining shortfall on the loan can be discharged in a Consumer Proposal or Bankruptcy
  
  
• Leased Vehicles: Any remaining lease obligations after returning the vehicle can also be included in a Consumer Proposal or Bankruptcy as an unsecured debt.

In either a consumer proposal or bankruptcy (especially if you consumer good (vehicle) is leased, then you need to decide from the outset if you are going to keep paying for the asset or stop and have is seized by the secured creditor.  Continuing to make payments under the loan well into either a bankruptcy or proposal period may change your rights of having this debt discharged and those of your creditors. .

Important Consideration: Eastern Canadian Banks and Different Laws

Many of the banks operating in BC are headquartered in Eastern Canada, where the Seize or Sue rule does not apply. We have seen cases where a vehicle is seized in BC, yet the lender still attempts to collect on the shortfall. Borrowers should be aware of their rights under BC law and remind lenders of these provisions if necessary.

Final Thoughts: Protect Yourself Before Signing

• Be cautious when co-signing or guaranteeing loans – you are taking on full financial responsibility if the borrower defaults.
• Understand the Seize or Sue law in BC – lenders must choose between repossessing the vehicle or suing for the outstanding balance.
• Leasing is different from financing – leased vehicle debts are not protected under Seize or Sue laws.
• Business Use Assets are not considered a Consumer Goods: Assets (like a dump truck, or scaffolding systems, for example) are not considered a “consumer good” and therefore not covered under the seize or sue provisions of the BC PPSA
• If you are struggling with vehicle debt, consult our Licensed Insolvency Trustees to explore your options under a Consumer Proposal or Bankruptcy.

For professional advice on managing debt and protecting your financial future, contact C.E. Craig & Associates Inc. today.