What Happens To Your Debts In A Bankruptcy?

When considering bankruptcy, one of the biggest concerns you may have is what happens to my debts if I file bankruptcy? There are two important dates in bankruptcy, both of which impact your debts.

Date of the bankruptcy filing

At the time your bankruptcy is filed, you will provide your Licensed Insolvency Trustee (LIT) with a list of your debts. Be sure to include both debts that you want to include in the bankruptcy (ie Credit Card debt), and others that you don’t want to (ie. Car loan, mortgage on a house).  If you aren’t sure who you owe money to, you might consider obtaining a copy of your credit bureau report or asking your LIT to do so for you.

Your LIT will notify your creditors about the bankruptcy once it is filed, and they are no longer permitted to collect from you. Once your bankruptcy starts, your payments on the debts being included can stop. During the bankruptcy period (usually a 9- or 24- month process, depending on whether you are a first or second time bankrupt), you do not have to make payments on your unsecured debts.

Date of bankruptcy discharge

Once your bankruptcy is complete, you will obtain a certificate of discharge. This means that your debts are ‘discharged’ – gone, erased, eliminated – and you are no longer legally responsible to pay them. However, your bankruptcy discharge does not stop your creditors from contacting co-signors, if any, and asking them to make payments on those debts. Your bankruptcy does not protect any co-signors or guarantors on the accounts.

Debts not covered by bankruptcy

In all cases, there are certain debts that are not covered by bankruptcy. These debts are outlined in Section 178 of the Bankruptcy and Insolvency Act, but are reproduced below for you:

Debts not released by order of discharge

178 (1) An order of discharge does not release the bankrupt from

(a) any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail;

(a.1) any award of damages by a court in civil proceedings in respect of

(i) bodily harm intentionally inflicted, or sexual assault, or

(ii) wrongful death resulting therefrom;

(b) any debt or liability for alimony or alimentary pension;

(c) any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;

(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others;

(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim;

(f) liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee unless the creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim;

(g) any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred

(i) before the date on which the bankrupt ceased to be a full-or part-time student, as the case may be, under the applicable Act or enactment, or

(ii) within seven years after the date on which the bankrupt ceased to be a full- or part-time student;

(g.1) any debt or obligation in respect of a loan made under the Apprentice Loans Act where the date of bankruptcy of the bankrupt occurred

(i) before the date on which the bankrupt ceased, under that Act, to be an eligible apprentice within the meaning of that Act, or

(ii) within seven years after the date on which the bankrupt ceased to be an eligible apprentice; or

(h) any debt for interest owed in relation to an amount referred to in any of paragraphs (a) to (g.1).

In all cases, at the time of filing, your LIT will discuss any of the items above which may apply to your debts, based on the information provided by you.

Once your bankruptcy is discharged, you should confirm that your credit bureau has been updated.  Your bankruptcy will show on your credit bureau for 6 years following the discharge, but the debts that were included in the bankruptcy should state they were included. Your LIT does not report directly to the bureau. Both Transunion and Equifax, Canada’s two credit bureaus, obtain information directly from the Office of the Superintendent of Bankruptcy (OSB). The OSB maintains records of all bankruptcies and proposals filed in Canada and the dates of bankruptcy discharges. If there is an error on your credit bureau report, you can reach out directly to the credit bureaus to have the error corrected.  You may need to provide a copy of your certificate of discharge, so be sure to keep it in a safe place.

Filing bankruptcy is a good option for those who feel overwhelmed by their debts and aren’t able to reach an arrangement with their creditors, either informally, or by using a Consumer Proposal.

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