What debts can be part of my bankruptcy?

Before you and your credit counsellor decide that bankruptcy is the right option for you, you need to know which of your debts will be erased following your discharge.

Unsecured debts

Unsecured debts are those obtained with no collateral, such as a house or a car the lender can seize and sell should you fail to repay the debt as agreed. It commonly includes credit cards and lines of credit. You can’t go out and buy a new motorcycle on your credit card, declare bankruptcy the next day and keep your new toy (which is likely to constitute fraud), but for the most part items that you purchase on a card or line of credit remain yours even after bankruptcy. Utility bills, medical bill, phone bills and taxes are other examples of unsecured debts.  There are some exceptions —always fully disclose all of your debts to your prospective bankruptcy trustee to find out for sure what is eligible — but most unsecured debts are discharged in bankruptcy.

Secured debts

Secured debts are those on which the lender continues to hold some sort of title or lien that lets them seize and sell the asset to recover their money should you fail to repay as agreed. The biggest secured loan most people have is a mortgage on a home. Secured debts are not discharged in bankruptcy. Again, you should discuss the particulars of your individual case with a qualified professional, but in general negative equity (if the security is worth less than the outstanding balance of the loan) means that you can simply default on the debt and surrender the asset, while if you do have equity (if for example your home is worth more than the amount of your mortgage), the amount will be included in your bankruptcy estate to be divided among your creditors, and you may have to sell the asset.

Student loans

Discharge does erase your obligation to repay your student loans if it has been more than seven years since you stopped being a full-time student when you file for bankruptcy. If you’re cutting it close, make sure you check the federal or provincial legislation applicable to your loans to find out the official date on which you stopped being a full-time student. A court may decide to reduce this time period to five years if you can prove repaying the loan will cause you “undue hardship”; you’d have to apply for an early discharge of your student loan debts that may be granted if you have acted in good faith with regard to repayment and are experiencing financial difficulty that prevents you from repaying them. To determine good faith, a court will look at how you spent your student loan funds, whether you made efforts to complete the education for which you borrowed the funds, whether you’ve made sufficient effort to repay them, and whether you have first made use of any available government repayment assistance programs.

You should always discuss your finances honestly and completely with a qualified credit counsellor before making any decisions about declaring bankruptcy. There may be other solutions available

 

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