Debt Managements

Does bankruptcy settle all debts in Canada?

Many Canadians are struggling with debt due to high interest rates and rising inflation that are increasing the cost of everyday necessities. You may be looking for a way to relieve financial stress and wondering if bankruptcy is the right solution for your situation. However, bankruptcy does not eliminate all debt – and it is important to understand the types of debt that bankruptcy eliminates before making a decision.

Let’s review bankruptcy in Canada and which debts can and cannot be eliminated through bankruptcy. We’ll also discuss whether bankruptcy can eliminate income tax debt and the importance of working with a professional like a non-profit certified credit counselor or licensed insolvency trustee (LIT) to help you navigate all of your debt relief options.

Understanding Bankruptcy in Canada

Canada has strict and fair rules when it comes to bankruptcy. Bankruptcy laws are designed to allow an honest debtor to get a fresh financial start. A person who is in a huge amount of debt has several options to deal with their debts. One of these options is bankruptcy.

Filing for bankruptcy allows an individual to obtain relief from their creditors (collection claims, garnishments, etc.) and retain their essential assets. Once the bankruptcy is completed, they can resume their financial life without debt. The bankruptcy petition must be filed with the bankruptcy commission, which will help the individual complete the bankruptcy administration.

A person filing for bankruptcy must comply with several obligations, including filing income reports and attending financial counseling sessions. These obligations also include providing information necessary to prepare income tax returns for the bankruptcy year. They must also report any property acquired after filing for bankruptcy and pay any agreed-upon amounts.

A consumer proposal is another form of bankruptcy for dealing with a large amount of debt and allows an individual to settle their debt for less than the full amount owed. The amount they will need to pay depends on each person’s unique situation, such as assets and household income. A consumer proposal will help the debtor come up with a consumer proposal they can afford, and is usually structured as monthly payments over five years. The individual filing a consumer proposal must also attend two financial counseling sessions.

Although debt consolidation is not a formal bankruptcy proceeding, it also allows an individual to obtain relief from their creditors by consolidating their debts into one fixed, affordable monthly payment.

Additionally, creditors have a specific time period to collect on outstanding debts, which varies from province to province. If your debt exceeds this statute of limitations, it becomes barred by law and legally uncollectible in some circumstances. LIT can advise you on your options for dealing with these types of debts as well.

What debts are eliminated through bankruptcy?

Bankruptcy or consumer presentation eliminates most unsecured debts, such as credit cards, lines of credit, personal loans, and even taxes. Unsecured debt means that when you buy something, the creditor cannot recover the goods purchased if you do not pay.

A purchase made with a credit card is an example of unsecured debt, where you owe the credit card company money and they have no claim on the purchase. Income taxes, rent, utilities (electricity and cable TV), and personal loans are also considered unsecured debt.

The creditor can still pursue you in other ways if you are unable to pay your unsecured debts — such as making threatening phone calls or garnishing your wages with a court judgment. Filing for bankruptcy or creating a consumer motion can protect you from further creditor action and allow you to resolve your debt challenges.

What debts cannot be eliminated through bankruptcy?

There are some debts that cannot be discharged through bankruptcy or consumer proposal, as this would be unfair to creditors and not in the public interest. These debts include:

  • secured debt
  • Spousal or child support payments
  • Court fines and parking tickets
  • Student Loans Under 7
  • Some debts arising from fraud or gambling.

secured debt

Secured debt is any type of debt that is backed by assets or property, which is used as collateral for the repayment of the debt. Mortgages and auto loans are examples of secured debt. This type of debt cannot be eliminated through bankruptcy or consumer proposal if the individual wishes to keep the asset. Scheduled payments must continue to be made to maintain possession of the property.

Asset surrender is an option available at the time of filing – and any deficiency will be included in the bankruptcy or consumer proposal. A good example of this is a car loan. If the car is worth $10,000, but the loan balance on the car is $15,000, the individual may choose to return the car to the secured creditor. The $5,000 deficiency would be a provable claim in the bankruptcy or consumer proposal.

arrears of maintenance and child support

Spousal support, child support, and current payments must continue to accrue even after a bankruptcy filing. If someone has wages garnished, they cannot be removed by filing for bankruptcy or a consumer motion. The regulations for collecting these arrears depend on the county in which you live, and LIT can provide insights into how to handle them.

Fines, penalties and parking tickets imposed by the court

Bankruptcy cannot exempt fines, penalties, and parking tickets imposed by the court. However, it is important to distinguish between these court-related obligations and debts issued under court judgments, as the latter can often be discharged in bankruptcy or a consumer proposal. LIT will help determine which debts are covered.

Student Loans

Student loans cannot be discharged through bankruptcy or consumer proposal if the individual has been out of school for less than seven years. However, determining the age of a student loan can be complicated—depending on factors such as the year of graduation or the last date you attended. Timing of the application is important, and LIT can clarify whether your student loan is eligible for discharge through bankruptcy or consumer proposal.

Debts resulting from fraud or gambling

You should seek professional advice from a bankruptcy expert if you are dealing with fraudulent and gambling debts. Discuss the details of your situation with them as their role is to guide you on the best course of action while being fair to your creditors and complying with Canada’s bankruptcy and insolvency regulations.

Fines, Penalties and Compensation Orders

Fines, penalties, and court orders for damages in civil cases involving intentional bodily harm, sexual assault, or wrongful death are not waived by bankruptcy or consumer proposal. LIT will need to review the details of the debt, including copies of the underlying orders and claims, to identify these types of debts.

Debts eliminated through bankruptcy or consumer proposal

Debts that are not eliminated through bankruptcy or consumer proposal

credit cards

Secured debt (where the individual wishes to hold the assets)

Unsecured lines of credit

arrears of maintenance and child support

Payday Loans (Installment)

Fines, penalties and parking tickets imposed by the court

Personal loans or consolidation loans

Student Loans Under 7

Income Taxes

Debts resulting from fraud, gambling, or obtaining property or services under false pretenses or fraudulent representation

Debts arising from an award of damages by a court in civil proceedings in respect of intentional causing of bodily harm, sexual assault, or resulting manslaughter.

Can bankruptcy eliminate income tax debt?

Most people assume that income tax debt cannot be eliminated through bankruptcy or consumer proposal. However, income tax debt is a claim that can be proven in bankruptcy or consumer proposal and will be eliminated once the bankruptcy or consumer proposal is completed.

The Canada Revenue Agency (CRA) has some Clearing rights —This means they can use some of your money from refunds or credits to pay off your tax debt. For example, they might take your income tax refund from before you filed for bankruptcy to pay off income tax debt from the same time period.

If a bankruptcy is declared, any tax refunds the individual is entitled to receive for the bankruptcy year and before will be considered assets in the bankruptcy proceedings. These refunds will be sent directly to LIT by the CRA. Tax refunds will return to normal the year after the bankruptcy and the individual will begin receiving them again.

Many individuals are also concerned that their government payments will be affected by a bankruptcy filing or consumer claim. However, the government cannot stop payments such as Canada Pension Plan (CPP), Old Age Security (OAS), Guaranteed Income Supplement (GIS) payments, Child Tax Benefit payments, Ontario Trillium Benefit payments, etc.

In some circumstances in bankruptcy, a LIT company may receive GST credits. Because Climate discount in Canada The tax refund is included in the tax refund amount, and will also be sent to the IRS for amounts related to the bankruptcy year and the prior year. However, the IRS will not receive any tax refunds or credits for the consumer if a consumer motion is filed.

What are the alternatives to bankruptcy or consumer proposal?

If you find yourself under financial stress, it’s important to seek debt solutions that fit your circumstances. A licensed nonprofit credit counselor or licensed legal counselor will review your unique financial situation to determine the best options for dealing with your debt. A debt professional can review all of your available options and help you understand them — even if they don’t involve filing for bankruptcy or a consumer proposal.

As Canada’s largest consumer insolvency firm, MNP Debt has over 60 years of experience helping Canadians break the cycle of debt. With over 80 locally licensed insolvency trustees serving over 240 residential and branch offices strategically located across the country, they are here for you. Your first step toward a debt-free future is to sit down with one of their licensed insolvency trustees for a free, confidential consultation. Visit To learn more or speak to a certified credit counselor today.

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