Can You Discharge Debt Legally in Canada?
If you’re drowning in debt and falling further behind each month, there may be a light at the end of this tunnel.
The federal Bankruptcy and Insolvency Act (BIA) offers Canadians who are experiencing overwhelming debt options to legally discharge all or most of their debt while protecting their essential assets, easing financial pressures, and rebuilding their financial situation with dignity.
In this article, we’ll explain how two of the most common government-regulated processes work, what debts they cover, and what you can expect along the way.
Legal Pathways to Discharging Debt
In Canada, two ways individuals can legally discharge all or some of their debt are by either:
These legal processes can only be initiated on your behalf by a Licensed Insolvency Trustee (LIT).
Once you and your LIT determine which of these two legal options is best for your specific situation, your LIT will begin the process on your behalf.
After the terms of your bankruptcy or consumer proposal are satisfied, your unsecured debt may be completely discharged, legally.
What Debts Can Be Legally Discharged?
Through a Consumer Proposal or bankruptcy, only certain unsecured debts can legally be discharged. This unsecured debt could include:
- Credit Card Debt
- Payday Loans
- Past Due Utility Bills
- Past Due Rent Payments
- Certain Income Tax Debt (check with your LIT)
- Medical Debt
- Personal Loans
- Overdraft Fees
- Student Loan Debt (if the debt is more than 7 years old)
In addition, in some cases, bankruptcies or Consumer Proposals can discharge certain debts related to civil lawsuits, as long as that debt isn’t related to fraud, harm, or criminal activity. When in doubt, consult with your LIT to determine if your legal debt will be covered in your insolvency proceeding.
Unsecured Debt Not Covered
While most unsecured debt can be discharged through a Consumer Proposal or bankruptcy, there are certain unsecured debts that cannot be legally discharged.
These unsecured debts include:
- Student Loans (less than 7 years old)
- Child Support Payments or Arrears
- Alimony Payments or Arrears
- Unsecured Debt Related to Fraud
- Court Fines
- Court-ordered Restitution from a Criminal Case
- Unsecured Debt Incurred After Filing
The best way to determine for sure if your unsecured debt will be discharged is to make a free initial consultation with a Licensed Insolvency Trustee like Powell Associates Ltd.
Will I Lose My Assets?
When considering legal options for discharging debt, it’s important to understand that bankruptcies and Consumer Proposals each have different implications for the assets that you own.
Bankruptcy
Bankruptcy doesn’t just discharge unsecured debt; it can also help to protect some of your essential assets. Assets, such as your primary vehicle, retirement plan, and certain personal belongings, may be exempt during your bankruptcy proceeding.
Each province in Canada has its own rules on which assets are exempt during bankruptcy. It is likely, depending on your situation, that you will be able to have the majority of your unsecured debts legally discharged, while your assets remain untouched (assuming your payments on those assets are up to date).
The only way to determine which of your assets will be protected during bankruptcy is to meet with a Licensed Insolvency Trustee.
Consumer Proposal
Unlike bankruptcy, where some of your non-exempt, non-essential assets may need to be surrendered to pay your creditors, one of the key advantages of a Consumer Proposal is the ability to retain your assets. Instead of surrendering property, you agree to make structured payments to your creditors over time. The value of any non-exempt assets is factored into your proposal payments, but you don’t have to give them up.
If keeping your assets is a top priority, a proposal may be the better option—provided you have the income to support the repayment plan. This makes a Consumer Proposal a better option for legal debt reduction for Canadians who may have significant equity in their home, or valuable assets that they would like to protect.
What Happens to My Secured Debt?
Debts that are secured by collateral are not covered by bankruptcy proceedings or Consumer Proposals.
Secured debts could include:
- Mortgage Loans
- Home Equity Lines of Credit
- Car Loans
- Secured Lines of Credit
- Some financed Furniture, Electronics, or Appliances
Unlike unsecured debts, which can be legally discharged through bankruptcy or a Consumer Proposal, you will still be responsible for making payments on your secured debt.
Bankruptcy and Secured Debt
Should you be unable to make payments on your secured debt, such as your mortgage or car loan, those assets may be surrendered to your LIT as part of the bankruptcy process.
If that is the case, those assets will be liquidated as part of the bankruptcy proceeding, and the proceeds from the sale will be used to pay those creditors. Any remaining debt balance after the asset is sold becomes unsecured and may be discharged through bankruptcy.
Consumer Proposal and Secured Debt
With a Consumer Proposal, none of your assets can be sold off to pay your debts. As long as you’re able to make your monthly payments on your secured debt, those assets will remain in your control.
Is Bankruptcy or a Consumer Proposal Worth It?
Having your unsecured debts discharged is just one of the benefits the Bankruptcy and Insolvency Act (BIA) offers Canadians. In addition to legally discharging unsecured debt, Consumer Proposals and bankruptcies may offer other advantages.
Advantages
- Protection from Creditors – Once you file for bankruptcy or a Consumer Proposal, all collection methods used by your creditors to collect your unsecured debt must end. This includes collection calls and letters, wage garnishments or bank account freezes.
- Your LIT Handles Everything – Once you and your LIT decide whether a Consumer Proposal or bankruptcy is your best option, the LIT will handle most everything from there, including filing all paperwork, communicating with your creditors, all court filings, and structuring your payment plan.
- Emotional Relief – After months or even years of being in debt and dealing with aggressive debt collection practices, many people find an immediate sense of relief after having their debt legally discharged.
- A New Start – Once your debts have been legally discharged through one of these options, you can begin a new start to your financial life, free from the burdens of unmanageable debt.
Discharging your unsecured debt legally through bankruptcy or a Consumer Proposal may sound like a no-brainer, but there are some downsides to these legal proceedings that you should be aware of.
Disadvantages
- Credit Score Impact – Once your bankruptcy is discharged, it will remain on your credit report for up to 6-7 years (depending in which Province you reside) (subsequent bankruptcies will take longer). A Consumer Proposal will remain on your credit report for 3 years after completion or 6 years from the filing date, whichever comes first. This could hinder your ability to take on new unsecured debt in the future.
- Some Assets not Protected – Non-essential assets that are not exempt from bankruptcy may need to be surrendered. This could include vacation properties, recreation vehicles, art collections, or luxury goods. On the other hand, with a Consumer Proposal, you remain in control of your assets.
- Cost – There are costs and fees associated with both bankruptcies and Consumer Proposals. These costs are not upfront, though, and are usually rolled into your monthly payments.
While taking a hit to your credit score or losing non-exempt assets to bankruptcy might seem daunting, for many Canadians, the relief and second chance these legal options provide often far outweigh the drawbacks.
If your debt feels impossible to manage and your financial situation is only getting worse, filing for bankruptcy or a Consumer Proposal may be a smart, life-changing step forward.
Next Steps: Let’s Figure It Out Together
Legally speaking, bankruptcy and Consumer Proposals are the only ways to discharge your unsecured debt in Canada.
So, how do you know which of these two debt reduction tools is right for you? Only you and your Licensed Insolvency Trustee, working together, can answer that question. Schedule a no-commitment, free consultation today with one of the advisors at Powell Associates Ltd., Licensed Insolvency Trustee.
Together, we’ll go over your finances, debts, and assets to determine the best way to proceed with getting your unsecured debts under control.