When you file for bankruptcy in Canada, not all debts are treated the same. Bankruptcy is designed primarily to help individuals eliminate unsecured debt, but some types of debt are excluded or treated differently depending on whether they are secured or ineligible.
Unsecured debt
Bankruptcy can eliminate most unsecured debts. These are where you have not pledged (also called “given security over”) something you own. Common examples include:
- Credit card debt
- Personal loans
- Payday loans
- Lines of credit
- Medical bills
- Outstanding utility bills
- Income tax debt These debts are discharged once your bankruptcy is complete, offering you a clean financial slate.
Secured debt
Secured debts are tied to specific assets, such as a home or a car. Common examples include:
- Mortgage
- Car loans
- Home equity lines of credit
- Instalment purchase loans
If you file for bankruptcy, you must decide whether to continue paying your secured creditors in order to retain the asset, or surrender the asset and eliminate the debt. Bankruptcy does not automatically remove secured debts unless you give up the underlying asset.
Ineligible debts
Certain debts cannot be discharged through bankruptcy. These include:
- Spousal support (Child support payments made by court order)
- Spousal support ordered by a court
- Court-ordered fines or penalties
- Student loans (if it has been less than 7 years since you were a full-time or part-time student)
- Debts obtained by fraud
It’s important to review your debt obligations with a Licensed Insolvency Trustee to fully understand what bankruptcy can and cannot discharge.