What Debts Are Erased in a Bankruptcy Discharge?

What About Secured Debts in Bankruptcy?

Secured debts cannot be erased by bankruptcy either as you have put up the asset that secures the debt as collateral in case you do not maintain the required payments.

If you have a shortfall on what is owed on a secured debt versus what it is worth you can include this debt in your bankruptcy.

Unsecured debts such as credit card debt, income tax debt owed to the CRA and other debts that are not secured by an asset are the most common debts that can be erased by going bankrupt.

Understanding Bankruptcy Discharge

When you file for bankruptcy, the ultimate goal is to obtain debt relief. Bankruptcy discharge is a legal court document that permanently and officially eliminates your unsecured debts. It marks the beginning of your fresh financial start. Once your debts are discharged, you are legally released from the obligation to repay those debts.

It’s important to note that not all debts are erased in bankruptcy. The types of debts that can be eliminated depend on the specific laws and regulations of your country. In Canada, for example, bankruptcy eliminates almost all unsecured debts, including credit card debts, lines of credit, payday loans, bank loans, installment loans, and certain tax debts.

Debts Eliminated by Bankruptcy Discharge

Bankruptcy covers a wide range of unsecured credit and debt. Unsecured debts are those that are not tied to any property or collateral. In Canada, the following debts are dischargeable through bankruptcy:

1. Credit card debt
2. Retail store cards and accounts
3. Personal loans
4. Installment loans
5. Bank loans
6. Unsecured lines of credit
7. Finance company loans
8. Payday loans
9. Past due bills
10. Loans from individuals
11. Judgement debts from lawsuits
12. Overdue tax debts
13. Certain student loans

It’s important to note that the debts included in your bankruptcy are those that you owe or are due as of the date of your bankruptcy filing. Bankruptcy also covers penalties and interest associated with each listed debt. However, there are certain debts that are not discharged in bankruptcy.

Debts Not Discharged in Bankruptcy

While bankruptcy provides significant debt relief, it doesn’t clear all debts. There are several types of debts that are not eliminated through bankruptcy. These include:

1. Spousal or child support payments
2. Alimony
3. Debts arising from fraud
4. Court-imposed fines and penalties, including traffic and parking tickets
5. Student loans if you have not been out of school for 7 years
6. Restitution orders
7. In some instances, gambling debts

If you owe child support or alimony, the recipient can submit a claim to your trustee to become a “preferred creditor.” This ensures that they receive one of the first payments from any funds in your bankruptcy. Divorce debts often contribute to bankruptcy filings, and eliminating other unsecured debts through bankruptcy may help individuals catch up on support payments.

Bankruptcy and Credit Cards

When you file for bankruptcy, you are required to surrender any credit cards to your trustee. However, this doesn’t mean that you won’t have any options for managing expenses or rebuilding your credit. While bankrupt, you can apply for a new secured credit card to use responsibly.

It’s important to note that running up your credit card balances right before declaring bankruptcy can have consequences. Bankruptcy does not eliminate debts resulting from fraud. If you intentionally make purchases on your credit card with the intention of not paying the debt, it may be considered a fraudulent transaction. This could result in the debt remaining after bankruptcy or the credit card company voting against your consumer proposal offer.

Bankruptcy and Student Loan Debt

Student loans are considered unsecured loans, but they are treated differently than other personal loans. While it is possible to discharge student loan debt through bankruptcy, certain conditions must be met. In Canada, you can only discharge your student loans through bankruptcy if you left school at least seven years ago.

This means that you cannot declare bankruptcy immediately after graduation. The law requires you to make every reasonable effort to repay your student loans before they can be discharged. While the seven-year rule applies in most cases, a bankruptcy court may consider discharging student loan debt early in extreme cases. To qualify for this hardship provision, you must demonstrate that you tried to repay your loans and utilized available assistance programs, yet still face severe financial hardship.

Resolving Tax Debts through Bankruptcy

Dealing with unpaid income taxes, source deductions, or HST installments can be a stressful experience. The Canada Revenue Agency (CRA) has strong collection powers and can act quickly to collect unpaid taxes. However, both bankruptcy and consumer proposals can successfully resolve outstanding tax debts.

Bankruptcy law is federal legislation, which means it can provide relief from tax debts. It is crucial to contact a Licensed Insolvency Trustee before the CRA places a lien on your property. A Licensed Insolvency Trustee can guide you through the process and help you determine the best course of action to resolve your tax debts.

Secured Debts and Bankruptcy

Secured debts, such as mortgages and car loans, are treated differently than unsecured debts in bankruptcy. Secured debts are loans that are tied to an asset or collateral. The approach to handling secured debts varies from unsecured debts.

When you file for bankruptcy, your secured lenders cannot cancel your loan solely based on the bankruptcy declaration. As long as you continue to make your monthly payments on your mortgage or car loan, you can retain those assets. If you are up to date on your mortgage payments, you should also be able to renew your mortgage with your existing lender. However, the decision ultimately rests with your lender.

It’s important to note that if you have significant equity in your home, bankruptcy may not be the ideal solution for eliminating your debt. In such cases, you may want to consider using the equity to consolidate or restructure your debts through a consumer proposal. A consumer proposal allows you to keep your assets while still eliminating debt.

Joint Debt and Co-signed Loans

When you declare bankruptcy, it relieves your obligation to repay the debt, but it does not release anyone who has co-signed or guaranteed the loan for you. If you have a joint debtor or co-signer, your creditor will hold them responsible for making the remaining loan payments.

The Bankruptcy Discharge Process

Upon receiving your bankruptcy discharge papers, you are legally released from all debts covered under your bankruptcy. This means you are no longer liable for payments, and you are protected from your creditors. However, it’s essential to note that certain parties can object to your discharge.

A creditor, the Superintendent of Bankruptcy, or your trustee can raise objections if you have not fulfilled your required duties, if your transactions before bankruptcy are questionable, or if you have committed an offense under the Act. If your discharge is opposed, a court hearing in bankruptcy court will be held. The outcome of the hearing may result in an automatic discharge, absolute discharge, conditional discharge, or suspended bankruptcy discharge.

Common Mistakes to Avoid When Filing Bankruptcy

Bankruptcy is a legal process, and your behavior leading up to filing can impact the outcome. To ensure a smooth bankruptcy process, it’s important to avoid these common mistakes:

1. Making large purchases on your credit card with the intention of avoiding debt repayment. Fraudulent debts are not dischargeable in bankruptcy.
2. Failing to file your tax returns before bankruptcy. Filing your tax returns allows you to receive any refunds owed to you and confirms your tax debt if you owe money. This is crucial if you want the Canada Revenue Agency to vote positively in a consumer proposal.
3. Prioritizing one creditor over others before bankruptcy. Paying off one creditor ahead of others is considered an offense under the Bankruptcy & Insolvency Act. Your trustee will inquire about any possible preferential transactions, and you might be required to return the money or face objections to your discharge.
4. Attempting to exclude a creditor from your bankruptcy filing. You are required to list all known debts on your Statement of Affairs. Knowingly omitting a creditor is an offense and can negatively affect your discharge. Leaving yourself in debt defeats the purpose of filing for bankruptcy.
5. Delaying your bankruptcy filing. Many people delay filing for bankruptcy out of fear for its impact on their credit score. While bankruptcy does appear on your credit report, defaults and heavy debt loads also harm your credit score. Filing sooner allows you to start rebuilding your credit sooner.

Get Rid of Unsecured Debt and Achieve Financial Freedom

When you find yourself unable to pay off your debts, it’s time to consider your options. Declaring bankruptcy is one solution to clear your debt problems and achieve a fresh financial start. If you’re feeling overwhelmed by your debts, it’s important to seek professional advice.

Contacting a Licensed Insolvency Trustee can provide you with a free debt assessment. They will review the types of debt you’re dealing with, analyze your budget, and help you develop a debt elimination plan. Remember, bankruptcy is a tool designed to provide a fresh start and relieve you from overwhelming debt. It’s a fair and consistent process that eliminates your debts and allows you to regain control of your financial future.

Book a free consultation with a Licensed Insolvency Trustee today and take the first step towards a debt-free life.

Locations and Additional Information

Bankruptcy Canada provides personal bankruptcy services in various locations throughout Canada.

For added convenience, phone and video-conferencing services are also available in additional areas. These services allow you to initiate the consultation process remotely, ensuring minimal disruption to your schedule.

At Bankruptcy Canada, we are dedicated to helping individuals overcome their debt challenges and achieve a brighter financial future. Contact us today for a free debt assessment and let us assist you in your journey towards debt elimination and financial freedom.