How Bankruptcy Can Help You Clear Your Unsecured Debts
When you claim personal bankruptcy the goal is to get debt relief if you are dealing with an overwhelming debt problem you cannot clear on your own so it is important to be aware of the debts eliminated by your bankruptcy discharge.
Fortunately, personal bankruptcy laws allow you eliminate most of your unsecured debts such as credit card debt, payday loans, tax debts, bank and installemnt loans and unsecured lines of credit.
Certain unsecured debts, such as fines, alimony and child support, are not eliminated by filing bankruptcy.
Bankruptcy doesn’t wipe out secured debts, or the unsecured debts as discussed above, so what happens when you get your bankruptcy discharge depends on the type of debts you owe.
What Does Having My Debts Discharged Mean?
Your bankruptcy discharge is a legal document that legally and permanently eliminates your unsecured debts and means you don’t have to pay on these debts any longer.
A bankruptcy discharge gives you a fresh financial start.
Receiving a discharge of your debts means you are released from the legal obligation to repay all of the debts listed in your bankruptcy.
Certain debts cannot be discharged in bankruptcy, including secured debts, some unsecured debts, and debts you incurred during your bankruptcy.
What Happens to my Debts?
Most people think that filing for personal bankruptcy eliminates them from the legal obligation to repay their debts.
However, this is not true.
The act of filing bankruptcy means you will receive an automatic stay of protection from your creditors, which means debt collectors and your creditors can no longer pursue you for debt collection or garnish your wages.
But it is when you successfully complete your bankruptcy and receive your discharge, that your debts are legally eliminated.
If you do not complete your bankruptcy (by not completely your duties as required under bankruptcy law), your debts will not be discharged and your creditors can continue to pursue you for debt repayment.
Your debts still exist throughout your bankruptcy proceeding.
When you go bankrupt, your creditors will receive a portion of the monies from your monthly bankruptcy payments, and a portion of any assets that you have assigned to your bankruptcy estate (although most bankrupts lose none of their assets or belongings).
Once you have completed a set period of time that you are required to be bankrupt (first time bankrupts without surplus income are required to be in bankruptcy for 9 months), you will receive your discharge from bankruptcy.
The final step of the bankruptcy process is when you receive your discharge from bankruptcy.
At this point all of the debts that are included in your bankruptcy will vanish.
What Debts Are Dischargeable in a Bankruptcy in Canada?
Only certain debts can be discharged by filing bankruptcy, such as most (if not all) of your unsecured debts.
Unsecured debts are debts that are not “secured” by being tied to an asset, such as your car or home.
Debts Eliminated by Your Bankruptcy Discharge Include:
- Credit card debts;
- Payday loans;
- Personal loans;
- Lines of credit that are unsecured;
- Overdue tax debts;
- Student loans of a certain age;
- Lawsuit debts;
- Unpaid bills;
- Bank loans;
- Retail store accounts;
- Installment loans;
- Finance company loans.
Bankruptcy will also discharge any interest or penalties you owe on your included debts.
What Happens to My Credit Cards?
When you declare bankruptcy, you must surrender all of your credit cards, even those with a zero balance, to your trustee.
Your Trustee will explain how you can handle bill payments and online purchases while you are bankrupt and without a credit card.
We recommend that you apply for a secured credit card once you go bankrupt, as this will function like a normal credit card for online purchases and booking travel, but you must “secure” the card by depositing money with the card issuer, which allows you to use this card while going through bankruptcy.
Before you go bankrupt do not use your credit card for major purchases, or this could be deemed fraud and the debt won’t be eliminated.
Making potentially fraudulent purchases on your credit card has another implication: if you decide to file for a consumer proposal, the credit card company will likely vote against accepting your consumer proposal.
What Happens to My Student Loan Debt?
Student loans receive special treatment in a bankruptcy, because they are personal loans guaranteed by the government.
While your student loans are technically dischargeable in bankruptcy, there are special rules relating to whether they can be discharged through bankruptcy.
In order to include your student loans in your bankruptcy, you must have been out of school for at least 7 years.
The law requires you to make every effort possible to pay off your student loans, although if you can prove hardship to repay these loans, you can discharge the student loans after only 5 years of being out of school.
What Happens to My Tax Debts?
While bankruptcy can deal with tax debts owed to the CRA, it is important you speak with a Licensed Insolvency Trustee before the CRA takes any action against you, such as placing a lien on your property.
The CRA has powerful collection powers, and they often act quickly to collect on your unpaid tax debts.
What Happens to My Joint Debt or Co-signed Debts?
Claiming bankruptcy eliminate your obligation on the debt, but it doesn’t clear the obligations of anyone who has co-signed a loan for you.
Your co-signer or joint debtor will become responsible for all of the remaining payments in full.
What Debts Are Not Discharged in Bankruptcy?
Debts that are non-dischargeable are debts that cannot be resolved or discharged through your bankruptcy.
While bankruptcy can clear most of your debts, it doesn’t eliminate all of your debts.
Debts not eliminated in a bankruptcy include:
- Secured debts, such as your mortgage debt or loans on your car;
- Spousal support payments;
- Child support payments;
- Alimony payments;
- Court imposed fines, such as parking tickets and traffic fines;
- Debts arising from fraudulent transactions;
- Restitution orders;
- Student loans unless you have been out of school for more than 7 years (or 5 years if you can prove it is a hardship to repay these loans);
- Gambling debts.
Mortgage Debts & Secured Loans are Excluded From Your Bankruptcy
Bankruptcy takes a different approach with secured debts from unsecured debt.
Secured debts are the main exception to what debts can be discharged by filing bankruptcy.
While you cannot discharge secured debts through bankruptcy, your lender cannot cancel your mortgage or car loan because you have gone bankrupt if your payments are up to date.
If you are able to maintain your payments you can keep your home or car.
In many cases, not having to pay on your unsecured debts allows you to have more funds to deal with paying your mortgage or car loan debt.
Your home equity will become an asset of your bankruptcy estate, so if you have a lot of equity in your home, you should consider a consumer proposal rather than a bankruptcy.
Can Anything Prevent My Bankruptcy Discharge?
Yes, your bankruptcy discharge can be opposed.
Your creditors, your trustee, or the Superintendent of Bankruptcy can object your discharge and prevent you from getting discharged from bankruptcy if you do not complete your required duties.
Your creditor can also oppose your discharge if they feel your transactions before bankruptcy were fraudulent.
Finally, your discharge can be opposed if you have commited an offence under the Bankruptcy & Insolvency Act.
Should your discharge be opposed, you will be required to attend bankruptcy court where the registrar or a bankruptcy judge will lay out the conditions of your discharge.
Generally, you will be required to be bankrupt for longer and make additional payments to receive your discharge.
