Can your debt survive a Bankruptcy?

Bankruptcy might seem like a straightforward path to a fresh start — an opportunity to wipe your debt clean and rebuild your life. However, it’s not always so simple. While Bankruptcy won't necessarily leave you with nothing, it will not completely erase all your debts.

As you consider Bankruptcy as your debt relief option, there are important details you should know about the state of your debts after filing:

Will a Bankruptcy or Consumer Proposal clear most of my debts?

Yes. A Bankruptcy or Consumer Proposal can clear most, if not all, of your debts. Both options can eliminate your unsecured consumer debts like credit cards, lines of credit, store cards, payday loans, tax debts, and most judgment debts from past lawsuits.

Unsecured debt comes from credit extended without any collateral - an asset provided to the lender as guarantee of repayment. Credit card debt is the most common type of unsecured debt. If you fail to make credit card payments, the card issuer cannot repossess the items you purchased but they can hire a debt collector to confront you.

What’s the cause of my financial struggle and how can it lead to insolvency?

Determining the root causes of your financial struggles is the first step to finding an appropriate solution. Factors such as gambling, job loss, critical health issues, rising cost of living, unmanageable debt, and family-related challenges can lead to financial instability. Students may experience limited cash flow and find it challenging to repay hefty student loans after graduation.

The consequences of these financial struggles can be far-reaching. Gambling addiction, for instance, may drive individuals to take bigger risks in a futile attempt to resolve mounting debts. Family conflicts may arise due to stress from financial difficulties, leading to costly court orders and potential insolvency. Meanwhile, students grappling with student loans might face challenges in finding lucrative job opportunities after completing their studies.

What do I lose in a Bankruptcy?

Filing for Bankruptcy does not mean losing everything. Various provinces have legislation that protects certain assets such as part of all of your home’s value, personal belongings, and work tools. However, you should be prepared to surrender some of your possessions and potentially a portion of your income to your creditors.

Which of my debts can survive a Bankruptcy?

Some debts are not dischargeable through Bankruptcy in Canada, as it would be unfair to creditors and not in the public interest. These include secured debts, alimony or child support payments, court-imposed fines and parking tickets, student loans under seven years old, and some debts arising from fraud or gambling.

Secured debt

A secured debt is any type of debt guaranteed by an asset / property pledged as security for repayment. Mortgages and car loans are examples of a secured debt. They cannot be eliminated through Bankruptcy, and you must continue making scheduled payments to retain possession of your property. In some cases, a Licensed Insolvency Trustee (LIT) might need to sell certain assets to satisfy creditors, especially when the value of the item is less than what you owe. In such situations, we recommend that you discuss your options with the LIT.

Alimony and child support arrears

Alimony and child support payments must continue even after declaring Bankruptcy. The regulations for collecting these arrears depend on the province you live in, and your LIT can provide insights into how they should be handled.

Court-imposed fines or penalties, and parking tickets

A Bankruptcy cannot discharge court-imposed fines, penalties, and parking tickets. However, it's essential to differentiate between these court-related obligations and judgment debts from lawsuits, as the latter can often be eliminated in a Bankruptcy. Your LIT can help you understand which debts are covered.

Student loans

Student loans that are more than seven years old can typically be cleared through Bankruptcy. However, determining the age of a student loan can be complex, depending on factors such as your graduation year. A LIT can clarify whether your student loan is eligible for discharge through Bankruptcy or a Consumer Proposal, and the timing of the filing matters.

Debts from fraud or gambling

If you’re dealing with fraud and gambling debts, then you should seek professional advice from your LIT. Discuss the specifics of your situation with them as their role is to guide you towards the best path while being fair to your creditors and adhering to Bankruptcy and insolvency regulations in Canada.

If you find yourself overwhelmed by financial stress, it's time to seek relief and explore available debt solutions tailored to your circumstances. LITs offer a wide range of debt relief options, including Bankruptcies and Consumer Proposals. If these are not the right fit for you, your LIT can also recommend credit counseling or other suitable debt solutions.

Schedule a free and confidential appointment with a LIT to discuss your situation so you can look forward to a bright financial future.