Secured Debts in Bankruptcy: How Does it All Work?

How Canadian Bankruptcy Impacts Secured Debts

Navigating the complex world of bankruptcy can be daunting, particularly when it comes to understanding how secured debts factor into the equation. This article sheds light on the interplay between bankruptcy and secured debts in Canada, providing a comprehensive guide on the topic.

Understanding Secured Debts

Secured debts are essentially obligations linked to an asset or collateral like your home or vehicle. When declaring bankruptcy, it’s crucial to note that such debts are not automatically cleared.

Key Considerations for Secured Debts

When dealing with secured debts in bankruptcy, there are several pivotal factors to consider:

  1. Current status of your mortgage payments: If you’re behind on your mortgage payments, foreclosure is a possibility, irrespective of your bankruptcy status. In certain cases, the lender may have the right to repossess the property once bankruptcy is declared. However, this doesn’t always happen, especially with houses, where it’s often more profitable for the lender to continue receiving mortgage payments if the debtor can afford them.
  2. Equity in your asset: Equity refers to the surplus value of an asset after subtracting all associated liabilities (mortgage balance, outstanding property taxes, utility bills, and legal and real estate fees). If the asset’s value is less than the total liabilities, you are said to have “negative equity”.
  3. Desire to retain the asset: Your decision to keep or surrender the asset plays a crucial role in how your bankruptcy process will unfold.

The Fate of Secured Debts in Bankruptcy

Secured debts in bankruptcy can take different paths, depending on the circumstances.

Negative Equity or Surrendering the Asset

If your asset has negative equity or you choose not to keep it, you can default on the payments and hand over the asset to the creditor. In this scenario, the secured debt transforms into an unsecured debt, which can then be included in and discharged by your bankruptcy.

No Equity

If your asset has no equity, it remains separate from your bankruptcy proceedings. You can hold onto it as long as you stay up-to-date with your mortgage payments.

Positive Equity

In cases of positive equity exceeding the bankruptcy exemption limit, the surplus value is considered part of your bankruptcy estate. Your Licensed Insolvency Trustee could potentially seize and sell the asset. However, if you can source the funds from elsewhere (e.g., family), you may be able to retain the asset—and continue with the mortgage payments.

Important Reminders

Here are a few crucial points to remember:

  • In a consumer proposal, your secured debts and assets remain unaffected. This is one of the many advantages of opting for a consumer proposal over bankruptcy.
  • Filing for bankruptcy relieves you from making payments towards your unsecured debts. This could potentially free up more funds for your mortgage, property taxes, utilities, and car payments.
  • Determining equity can be complex—it’s not just about the “fair market value”. Provincial bankruptcy exemptions further complicate this process. That’s why it’s advised to consult a Licensed Insolvency Trustee for their expert guidance.

Seeking Assistance

Navigating through bankruptcy in Canada can be a complex task. It’s advisable to consult a Canada Licensed Insolvency Trustee for reliable advice and assistance. Initial consultations are typically free and can set you on the path to financial stability.

The Bankruptcy Process in Canada

Bankruptcy in Canada begins when you file for it with a Licensed Insolvency Trustee (LIT). As the only professionals in Canada authorized and regulated to administer bankruptcies, your trustee is responsible for settling your debts by distributing the proceeds from your non-exempt assets to your creditors.

Understanding Non-Exempt Assets

A non-exempt asset is an asset that exceeds the equity limit set by your province. For instance, if your vehicle’s value surpasses the limit set by your province, your trustee may sell it to repay creditors. You would still receive the “non-exempt” amount of the asset, while the creditors would get the remainder.

Alternatively, if you wish to keep an asset that goes over the exemption limit, you can negotiate with your creditors to “buy back” the asset by paying off the amount that exceeds the exemption limit.

Each province provides a list of exempt assets that you can retain, regardless of your bankruptcy status. During your bankruptcy, you will likely need to make monthly payments to your trustee.

The Duration of Bankruptcy

The length of your bankruptcy largely depends on whether it’s your first bankruptcy and if you fulfill all assigned duties. For first-time bankruptcies, the process typically lasts about 9 months. However, if you need to pay surplus income, your bankruptcy may extend up to 21 months. The calculation for surplus income is based on standards established by the Office of the Superintendent of Bankruptcy Canada and is coordinated by your trustee after reviewing your income, expenses, and dependents.

In the case of a second bankruptcy, the timeline increases to 24 or 36 months. If you have been bankrupt more than once before, have not complied with your duties, or have committed one or more bankruptcy offences, your bankruptcy timeline will be determined by the court.

Once you receive an Absolute Discharge from your bankruptcy, you will be free from any of the discharged debts. However, your credit rating will reflect your bankruptcy for 6 to 7 years, depending on your province.

The Meaning of “Discharged”

Being “discharged” signifies the end of your bankruptcy. It means that you are no longer obligated to pay your debts and can apply for credit. However, failure to complete your duties during bankruptcy can result in you not getting discharged. This would lead to your trustee closing your file and creditors resuming collection efforts against you. To learn more about how to navigate through bankruptcy, read about how long bankruptcy lasts in Canada.

Impact of Bankruptcy on Debt

Bankruptcy helps eliminate most of your debts, such as unsecured debts including credit card bills, medical bills, and payday loans. However, you may still be required to pay your secured debts, such as your mortgage or car loan.

Certain debts cannot be cleared by your bankruptcy. These include:

  • Court-imposed fines
  • Debt incurred by fraud
  • Alimony or maintenance payments
  • Debt for damages imposed by Civil Court for intentional bodily harm, sexual assault, or wrongful death
  • Student loans, if bankruptcy occurs within 7 years of ceasing full- or part-time studies

Dealing with Debt Collectors Post-Bankruptcy

Once you file for bankruptcy, all creditors and collection agencies are required by law to stop contacting you. This period of halted collections activity is known as a Stay of Proceedings. Additionally, a creditor cannot garnish your wages.

However, you may continue to receive calls from secured creditors. This applies to a mortgage, lien on a car, or debt for alimony or maintenance.

Effect of Bankruptcy on Regular Income

Your wages are not directly affected by your bankruptcy. However, you are required to provide your trustee with information on your monthly household income and expenses as part of your duties during bankruptcy. Additionally, if your income changes or you gain or lose a dependent, you must inform your trustee.

You may also have to make monthly payments to your trustee, known as “surplus income payments”. Your trustee determines whether you have to make these payments based on your average earnings over the bankruptcy and the number of people in your household.

Maintaining a Bank Account During Bankruptcy

You can maintain a bank account during bankruptcy. However, if you have more than $999 in your account and want overdraft protection, you must inform your bank about your bankruptcy. To prevent creditors from withdrawing money, it is recommended to open a new account at a bank where you don’t owe money. During your bankruptcy, only use this new account and avoid using any accounts that were active prior to your bankruptcy.

Getting a Credit Card After Bankruptcy

Once you file for bankruptcy, you must surrender your credit cards to your trustee for cancellation. Additionally, your bankruptcy will have a negative impact on your credit rating. Canadian credit bureaus will note your bankruptcy on your credit report for up to 7 years, depending on your province.

Costs of Declaring Bankruptcy

Bankruptcy fees are regulated by the federal government, and you can discuss the costs of filing for bankruptcy with a LIT during a free, initial consultation. To learn more about the costs of bankruptcy, discover how to file for bankruptcy in Canada.

Student Loans and Bankruptcy

If you were a student less than seven years from the date that you declared bankruptcy, you will have to repay your student loan debt, including the interest charges.

However, certain conditions can enable you to have your student loan debts discharged, even if the official last day of school was less than seven years ago. These conditions include:

  • You have been out of school for at least five years
  • You acted in good faith with respect to the loan
  • You have and will continue to experience financial difficulty that prevents you from repaying the loan

Retaining Assets During Bankruptcy

Secured debts such as a vehicle lease or a mortgage are typically unaffected by bankruptcy, provided you continue to make payments and there is no equity in your secured assets.

In most provinces, declaring bankruptcy does not mean you have to lose your house or car. You can negotiate with your trustee and creditors to keep the asset and continue paying the mortgage or loan. Learn more about what assets you can keep in bankruptcy.

Bankruptcy and Tax Debts

Contrary to common belief, income tax debt can be discharged in a bankruptcy. In a bankruptcy, your debt to the CRA is treated the same as any other unsecured debt, such as credit cards or lines of credit. After filing for bankruptcy, all interest and collection activity by the CRA will cease. Furthermore, your trustee will communicate directly with the CRA on your behalf.

Learn more about bankruptcy.

In conclusion, bankruptcy is a complex process that requires careful consideration and understanding, especially when it comes to secured debts. It’s always recommended to seek the advice of a Licensed Insolvency Trustee to navigate through the process successfully.

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