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Dischargeable Debts

September 13, 2021

Dischargeable debts are debts that will be discharged (forgiven) as a result of filing a bankruptcy or a consumer proposal.  The vast majority of debts can be discharged, but there are a few exceptions that it is important to note.

Debts That Cannot Be Discharged

Secured Loans:

If you have a secured loan (usually a mortgage or car loan) and decide to keep the security (house or car) you will be required to pay the loan or mortgage in the ordinary course of business – as if the insolvency never happened. 

If you return the security to the lender, in order that they can sell it to recover the amounts owed to them, including costs, the balance of the debt after sale will be dischargeable.  If there were a surplus from the sale, that extra money would belong to you.

Student Loans:

For student loans to be discharged in either a bankruptcy or a proposal, they must be at least five years old at the time of filing.  After five years the debts may be discharged by court order if the debtor can prove that repayment would cause a significant financial hardship.  Alternatively, if the debtor is seven years past the date that corresponds with the end of study (the last date of the last course taken for which the student loan was applied) the debt will automatically be discharged.

Family Support:

Amounts payable for child or spousal support cannot be discharged in an insolvency proceeding.  However, cost awards, that did not constitute “support” under the order, can be discharged.

Fraudulent Debts:

If a debt was incurred by fraudulent means it will not be subject to discharge in an insolvency proceeding – it is important to recognize that it is not sufficient for the creditor to allege fraud, they must prove it.  Proving fraud can be challenging because while behaviours by the debtor may have what we call “badges of fraud” they do not necessarily indicate intent.

Fines and Court Penalties:

Fines for moving violations or restitution orders that are similar to fines and other penalties imposed by a court for a criminal offence may not be discharged in an insolvency proceeding.

Liability for a Dividend:

Whether you file a bankruptcy or a proposal, if there are funds left over after paying the Licensed Insolvency Trustee’s fees, those funds are distributed amongst the (unsecured) creditors as a dividend.  If the debtor/bankrupt forgot to tell the LIT about a creditor, so that they could receive notice of the dividends, the creditor may expect the debtor/bankrupt to pay the amount of the dividend they were deprived of by the debtor’s/bankrupt’s neglect.

Most Debts are Dischargeable:

As you can see most debts, even government debts, can be resolved through the filing of a bankruptcy or a proposal are dischargeable (can be dealt with through a bankruptcy or proposal).  The only other possible exception would be debts to friends and family members – they will always be friends and family unless soured by non-payment of monies owed to them.  While there is no legal obligation to pay these creditors and they cannot take legal action to recover the money, many debtors/bankrupts pay these folks back anyway.

For more information call:  519-646-2222