When it comes to unmanageable debt, there are a few different debt relief options available to you: consumer proposal and bankruptcy. Each option has its own benefits and drawbacks, so it’s important to understand what each one entails before making a decision. In this article, we will focus on the question of whether or not a consumer proposal or bankruptcy will release you from all types and forms of debts. Keep reading to find out!
Difference between consumer proposal and bankruptcy
A consumer proposal is a formal legal process through which you can negotiate with your creditors to come up with a repayment plan and make monthly payments that suits both parties to generally deal with your unsecured debt. This option is sometimes referred to as debt settlement. We previously wrote an article discussing whether a consumer proposal is worth it – feel free to check that out.
Bankruptcy is also a legal process. If you choose to file for bankruptcy, all of your assets will be liquidated (or you can opt to pay for some, or all of them and keep them!) and these proceeds will be distributed to your creditors. You may also be required to make payments depending on your income level, family size, and non-discretionary expenses (i.e. medical expenses, work-related expenses, child support, etc.).
Both options are filed through an Insolvency Trustee and are legislated by the Bankruptcy and Insolvency Act (BIA).
Knowing which debts can and cannot be included if you file a consumer proposal or bankruptcy is paramount to knowing if either is the right debt relief option for you. If it ins’t you may want to look at other options.
So, will a consumer proposal or personal bankruptcy release you from all types and forms of debt?
While a consumer proposal and bankruptcy will release you from most types of unsecured debt, neither option will automatically absolve you of all your debt obligations. The Bankruptcy and Insolvency Act outlines debts that are not discharged in s. 178. While the BIA can be a little complicated to read, here is a brief summary of the most common debts that are not discharged by a consumer proposal or bankruptcy.
Debts not dischargeable when you file a consumer proposal or bankruptcy
Section 178 of the Bankruptcy and Insolvency Act outlines the following debts are not dischargeable in both types of bankruptcies:
- Fines, Penalties, and/or Restitution orders imposed by a court.
- Any court-awarded damages in regards to intentionally inflicted bodily harm, sexual assault, or wrongful death resulting from them.
- Debts related to alimony or alimentary pensions.
- Any debt related to support or maintenance of a (former) spouse or child.
- Debts arising from fraud, embezzlement, misappropriation, or defalcation.
- Debts resulting from obtaining property or services by lying, or via fraudulent means.
- Student loans or any other provincial loans for students, such as apprenticeship loans, unless you have been out of school for 7 years. Read about Student Loans and Bankruptcy.
- Any Secured debt, unless you wish to surrender the asset used as collateral. This would include debts like a mortgage or car loan unless you want to give up your house or car. Your secured creditors will allow you to continue making payments and retain the asset.
If you fail to include a creditor in filing a bankruptcy or consumer proposal, depending on exact circumstances, you may be required to pay the creditor what they would have received had they been included in the consumer proposal or bankruptcy and been eligible to receive a dividend.
Still not sure which of your debts will be discharged?
If you are unfamiliar with the terms indicated above, then they likely will not apply to you. The most common debts people face in the list above are:
- Student loans not outside of the 7 year window, and
- Child/Spousal Support obligations.
Most unsecured debts, such as personal loans, payday loans, lines of credit, and credit cards can be discharged.
Unsecured debt is simply a debt that does not have any collateral attached to it. A credit card is an example of this.
Your best bet is to talk with a Licensed Insolvency Trustee
So, if you want to file a consumer proposal or bankruptcy as a way to get out of debt, be sure to speak with a Licensed Insolvency Trustee to find out which debts will and will not be released. They can help you understand your debt relief options and help you start your journey to becoming debt-free.
Common Questions We Get About Dischargeable Debts In Consumer Proposals And Bankruptcies
Do traffic and parking tickets count as fines and penalties imposed by a court?
Yes. While you may not have actually attended court, they are considered to be imposed by the court and as such will survive a consumer proposal or bankruptcy.
How are student loan payments treated if they survive?
During the period of your bankruptcy or consumer proposal you are not required to make student loan payments, however, the interest will continue to accrue on your student loans. It is recommended, if you are able, to make these payments. Student loans may require your Licensed Insolvency Trustee’s permission for you to make payments on your loans while in your consumer proposal or bankruptcy. In saying this, we have observed student loans reporting missed payments on the credit report.
However, if student loans submit what is known as a Proof of Claim; a legal document indicating that you actually owe them money which allows them to participate in the proposal or bankruptcy will receive payments from your consumer proposal payments or your bankruptcy payments.
Are some debts treated differently in a consumer proposal vs a bankruptcy?
As it relates to whether or not they are discharged, no. However, in a consumer proposal, certain debts must be paid within specific timeframes regardless of the overall duration of the proposal. For example, if you operate a business as a Sole Proprietor, owe source deductions, and wish to file a consumer proposal you will have to pay those within 6 months of your consumer proposal being court-approved.
This article was written by Angela Rodgers, CIRP, LIT. She is a Licensed Insolvency Trustee and the President of Powell Associates Ltd. She has worked in the insolvency industry for over 20 years. No matter if you are looking at filing bankruptcy, a consumer proposal, or simply looking for debt management advice, Angela can help.