What Happens to My Debts When I Go Bankrupt in Canada?

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What happens to your debts when you go bankrupt in Canada? Does declaring bankruptcy clear all debts? These are complex topics. The answers depend on the type of debt, and in some cases on your payment status. There are actually some debts that stay (are not discharged), even if you file for bankruptcy.

Bankruptcy basics

The concept behind a personal bankruptcy in Canada is relatively simple. When you file for bankruptcy, you surrender assets in return for the discharge of your debts. Just as there are some bankruptcy exemptions which mean that you don’t lose all your assets, there are also some exceptions to the discharge of all your debts. Both are affected when debts are secured by assets, as in a mortgage.

Does declaring bankruptcy clear all debts? Not always. In practice, bankruptcy only discharges unsecured debts, because the creditor in a secured debt has a special right to a certain security (sometimes called collateral), which is your asset. Here is an example: if your mortgaged asset (such as your house) is worth more than the amount outstanding (owing) on the mortgage, the excess (your equity) must be surrendered.

Unsecured debts

Although bankruptcy does not clear all debts, here are some examples of unsecured debts that go away:

  • Credit card balances
  • Lines of credit (if unsecured)
  • Personal loans (if unsecured)
  • Arrears of income taxes and municipal house taxes
  • Unpaid utility bills
  • Retail store accounts
  • Insurance premiums past due
  • Medical bills
  • Payday loans

Bankruptcy will discharge most your unsecured debts, but the law makes exceptions for these unsecured debts that stay:

  • Student loans and apprentice loans less than 7 years old
  • Child and spousal support
  • Fines and most court-ordered restitution payments
  • Court-awarded damages for sexual assault or intentionally inflicting bodily harm
  • Debts that arose as a result of fraud, embezzlement or misappropriation
  • Certain government overpayments; overpayments are a complicated area, so if you have received overpayments from the government, you should discuss this with your Licensed Insolvency Trustee.

Secured debts

Depending on your unique situation, some secured debts may stay. One of these may be your house mortgage, especially if you are mortgaged for the majority of your house’s value. Other debts secured by collateral may also possibly stay. For more information about secured debts in a consumer bankruptcy, see our webpage Secured Debts in a Bankruptcy in Canada.

A Licensed Insolvency Trustee can advise you

Does bankruptcy clear all debts? Not in all cases, but it does provide a new starting point and relief for most unsecured debts. Bankruptcy can be a complicated topic, but help is available. For more information on whether bankruptcy is a good solution for your situation, contact a Licensed Insolvency Trustee for a no-charge consultation.