A common thought when faced with financial difficulties is – “Well, I will just go bankrupt, and all my debt will be taken care of.” This can be true, but it isn’t always the case. However, understanding the nuances of bankruptcy and its implications is crucial for making informed decisions about managing financial challenges. Let’s delve deeper into the intricacies of these processes and explore their impact.
Bankruptcy and Consumer Proposal Will Stop Creditor Collection
Bankruptcies and proposals provide immediate relief from creditor collection – one of the main benefits of bankruptcies and proposals. When a proposal or bankruptcy is filed, it is because there is not enough income or assets available to pay all the lenders in full.
When you file a bankruptcy or a consumer proposal, your creditors can no longer collect against you while you are working on completing the obligations set out by each of these processes – check out how these different options work here. Your debts still exist, but they are temporarily frozen in time, and creditors cannot collect while processing.
The Licensed Insolvency Trustee will collect a payment from you through this process. They will review all the debts, and once all the funds are collected, they pay the creditors their share of the funds collected. In a bankruptcy and a proposal, typically, creditors receive only a portion of the outstanding debt, and the remainder of the balance is unpaid when the process has been completed.
What Happens to Debt When a Bankruptcy or Proposal is Completed?
If you successfully complete your duties and make all your payments, you will be discharged from the bankruptcy or proposal. At this time, creditors will receive a final payment, and if there is still a portion of the debt outstanding after the bankruptcy or proposal, the remainder of the balance owing may be legally discharged. This means the creditors cannot collect against the remaining balance.
Debts such as credit cards, lines of credit, payday loans, and bank loans are discharged through bankruptcy or proposal unless they fall under the exceptions noted below.
What Debts Are Not Discharged by A Bankruptcy or Proposal?
Not all debts are discharged by a bankruptcy or a consumer proposal. Once all the payments have been made to the creditors in the bankruptcy or proposal, the remaining balance owed to the creditors who hold a nondischargeable debt will be legally permitted to pursue the collection of the remaining balance after the completion of the bankruptcy or proposal. Undischargeable debts are an exception, and there are limited creditors to which this would apply.
Why would you file a Bankruptcy or Proposal if You Have a Debt that is not Discharged by the Bankruptcy or Proposal?
Ensure your Licensed Insolvency Trustee is fully informed about your financial situation so they can identify any non dischargeable creditors at the outset of the process. This will help them to adequately assist you in making an informed decision about whether bankruptcy or a proposal is a good option for you and your specific debts. Find advice on finding the right professional for you here.
When people have a mix of dischargeable and undischargeable debts, it is essential to ensure that filing for bankruptcy or making a proposal makes good financial sense. Some considerations include:
- A bankruptcy or proposal will resolve those dischargeable debts, so after the process, you can focus on repaying the undischargeable debt that survives the process.
- All creditors receive a dividend from this process – the dividend received for the nondischargeable debt will reduce the total owing after the bankruptcy or proposal is completed
Which Creditors Survive a Proposal or a Bankruptcy?
The creditors that survive a proposal and bankruptcy are as follows:
- Canada Revenue Agency debt owing by a sole proprietor or a partner in a partnership for outstanding employee wage remittances.
- Arrears for alimony, spousal support (including alimony pension), or child support. There is a provision that allows for the payment of these debts – outstanding in the year before the bankruptcy or proposal – in priority to other unsecured creditors. The remaining balance owing would result in a pro-rated share of the distributions provided to the remaining unsecured creditors. With these two kinds of dividends payable in a bankruptcy or a proposal, the remaining undischarged balance will be further reduced.
- Bankruptcy and proposals only resolve past debts, and you would be responsible for making any ongoing payments for alimony, spousal support, child support or maintenance during the term of the bankruptcy or proposal. See our blog here about how these payments are deducted from your income when determining your bankruptcy payment.
- If someone has federal or provincial student loans and has attended school in the last seven years, the student loan cannot be written off in a bankruptcy or proposal, and the balance owed survives. You can also read more about this in Understanding Student Loans – Part 1: The Basics and Understanding Student Loans – Part 2: In Insolvency.
- Apprenticeship Loans survive if the borrower is still an apprentice or has been an apprentice in the last seven years.
- Creditors you didn’t disclose to the Trustee can also collect against you. When someone files a bankruptcy or proposal, they are responsible for providing the list of all creditors to whom they owe money. Suppose a creditor has not been included in the process. In that case, if the bankruptcy or proposal has already been completed and money has already been distributed to the creditors, then this rule would apply. The creditor is prevented from collecting against you for the total debt, but they can collect directly from you the dividend they should have received if they were included in the process.
- Some court-imposed payments would survive as well. A general list of types of court-imposed amounts that survive are:
- Traffic fines
- Bail bond
- Restitution
- Fraud (This can include repayment of Employment Insurance or Child Tax Benefits that were obtained fraudulently)
- Embezzlement
- Obtaining credit falsely
- Causing intentional bodily harm, sexual assault, or wrongful death
The details of these kinds of debts are essential to share and review with your Licensed Insolvency Trustee so they can properly advise you on whether this section would apply to your case.
Lastly, it is important to keep in mind that all of the interests associated with the debts listed above survive as well.
As you can see, the bankruptcy and proposal process is not complicated, but the details of your situation are crucial when you are making a decision about what debt restructuring option is best for you and your unique circumstances.
We encourage you to seek the assistance of a Licensed Insolvency Trustee to help explore your options and get invaluable guidance in making informed decisions that align with your unique circumstances and long-term financial goals. Conntact us today for a free consultation; we will be more than happy to review your situation and talk about your financial options.
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