What Debts are Eliminated in Bankruptcy?

What debts are eliminated in bankruptcy is an important question to answer before pursuing bankruptcy.

There are many reasons a person or a company may seek finance from a financial institution.

There are secured loans, unsecured loans, student loans, mortgage, etc. 

In Quebec, when filing for bankruptcy, the Bankruptcy and Insolvency Act set the rules for the types of debt you can discharge in the bankruptcy. 

Below are the types of debt you can include when you claim bankruptcy in Quebec.

Types of debt eliminated by bankruptcy

  • Credit card debt – financial institutions offer credit cards to clients that allow them to purchase consumer goods at retail store and make different types of payments.
  • Unsecured lines of credit  –  these are loans you can obtain without the need to use your assets as collateral to guarantee the funds.
  • Personal loans not secured against any asset – personal unsecured loans are similar with unsecured lines of credit in some ways since they do not require collateral against the loan, however the difference is in the manner the borrower’s funds are paid out. The personal loan amount is fixed and paid as a lump sum. But the line of credit is a revolving credit. In this instance the borrower does not take money out all at once but whenever needed. A credit limit is placed on the line of credit and the borrower takes as much or as little depending on their need.
  • Income tax and property taxes – these which do not need explanation also fall under the category of debt eliminated in a bankruptcy.
  • Unpaid bills such as utility bills, telephone or cable bills, membership payments and insurance;
  • Medical bills;
  • Payday loans.

Debts not eliminated by the bankruptcy

While you are able to claim bankruptcy for most unsecured debt whether they are unsecured lines of credits or unsecured personal loans, there are some types of unsecured loans that do not benefit from bankruptcy leniency.

These unsecured loans are the following:

  • Unsecured debts not eliminated
    • Students loans under the circumstances that you graduated less than 7 years ago;
    • Alimony and child support – These are often set by a court order after divorce which is also the reason why they do not fall under the category of debt eliminated in a bankruptcy. In fact, they are moral debt, your obligation to care for your children or a partner you’ve live with for some time when you divorced for one reason or another;
    • Court orders fines and penalties – if for instance you had a driving offence and need to pay, the bankruptcy will not eliminate the fine or the penalty;
    • Debts due to fraud.
  • Secured loans.

Secured Debt in Bankruptcy

All secured loans are not eliminated by the bankruptcy.

A secured loan is the type of loan that requires an asset to be used as a collateral against the loan.

For instance a mortgage, or a secured loan with collateral such as your car, etc.

In many cases, there are severe consequences when you file for bankruptcy.

This is the reason why your trustee may suggest that you consider other alternatives.

Your trustee will only recommend that you file for bankruptcy as a last resort.

You may want to consider filing for a Consumer Proposal instead of Bankruptcy.

For example, if you cannot pay debt you owe for your unsecured debt and file for bankruptcy.

The likelihood is that you are not able to pay for your secure debt also such as a mortgage.

Your secured debt creditor may seek to seize your house as collateral against your mortgage.

However, exemptions exist in Quebec.

It’s important to discuss your secured debts with your trustee.

Make sure to ask questions about your secured debts.

If you are thinking about filing for bankruptcy, it is important to know how it will impact you.

You can keep your mortgage or other assets placed as collateral when you are still able to make payment for those.

The secured debt creditor cannot terminate your secured loan because of the bankruptcy when you can prove you are able to make the payments and pay regularly.

Depending on your circumstances, therefore, it’s important to know the types of debt a bankruptcy claim can eliminate.

The initial free consultation with a trustee is crucial since you obtain essential information whether you can claim bankruptcy for your debts.