Many people are not sure what debts are or are not included when they apply for either a Bankruptcy or a Consumer Proposal.
This is something that is important to know when looking at solutions to a debt problem.
Generally debts that are included are credit cards, lines of credit, and loans that are all unsecured debts. Unsecured means that the debt is not tied to any of your assets, and the creditor has lent the money to you with no lien on any property you have. If you file for protection through either a Consumer Proposal or a Bankruptcy, then all of these debts are included.
The other type of debt is secured debt. This arises when creditors lend money and in turn take a lien on your property. The most common secured debts would be a mortgage or a car loan. These are debts that you will keep if you keep the asset.
There are times when someone cannot afford to keep a vehicle or a home. Through filing a proposal or a bankruptcy, you have the opportunity of returning the asset to the creditor. They will sell the asset and this debt is now unsecured and would be included in the proposal or the bankruptcy.
The third category would be debts that are not included as set out by the Bankruptcy and Insolvency Act in Canada. There is a specific section in the Act that sets out debts that are not dischargeable. These include:
- Court fines or penalties,
- Debts arising from fraud, bodily harm or other criminal activity.
If someone has these debts, then they are not discharged and the payments must be made.
There are two types of debt that do cause some confusion for people: tax debt and student loan debt.
Student loans are only included in a Consumer Proposal or a Bankruptcy if you have not been a student for 7 years or more. If you have been out of school for 5 years, you can apply to court for relief after the bankruptcy or proposal is completed. It is important before filing that a person know when they last ceased to be a student. The student loan centre will keep a record of this information and you can check with them before filing to make sure there are no problems.
The other type of debt is tax debt. Many people don’t know that unpaid amounts of income tax debt are generally included in the insolvency when a person files a Consumer Proposal or a Bankruptcy. The CRA does not have the power or preference over other creditors, and they are treated like other unsecured creditors.
It is important before filing to speak to a licensed debt professional about the options and the types of debt you have before filing a Consumer Proposal or a Bankruptcy. By getting all of the information beforehand, you can avoid any surprises later on.