Canada Bankruptcy - Types of Debt
In order to assess the nature of the debts you hold and how they are affected in a bankruptcy, one needs to know the type of contract you signed and the conditions imposed in the agreement. Principally, there are two types of debts, unsecured and secured debts.
Unsecured debts are often referred to as trade debts and typically include credit cards, lines of credit, overdrafts, utility and general everyday bills most of us have to pay each month. In a bankruptcy, unsecured creditors are unable to enforce their claim against you and automatically upon filing your assignment in bankruptcy you are granted a stay of proceedings protecting you from these creditors. Unsecured contracts are terminated by a bankruptcy, and if you receive a discharge from bankruptcy, their ability to collect no longer exists.
Secured debts often originate with the purchase of a significant asset such as a car, home, recreational vehicle, etc., etc., and are supported by a security agreement which allows the creditor to repossess or take back the asset(s) if you fail to pay or break the terms of your agreement with that creditor. Examples of secured debts include Car Leases, Home Mortgages, Rent to Own and Installment purchase contracts, where an asset is pledged or given up as security or given as collateral to be taken back if you do not pay. If you go bankrupt and do not pay, the creditor cannot make you pay, and their recourse or chance of recovery is limited to the pledged asset(s) itself.
If you get or have a consolidated loan it is very likely that the creditor has taken security and placed a lien on your asset(s). Although it does not happen in most cases, secured creditors may elect to cancel an agreement and repossess the asset notwithstanding that you want to continue your payments and keep the asset(s) and a bankruptcy will not prevent this if a creditor elects to do so.
If a person wants to keep an asset, it is important to keep a good relationship with that creditor. If you owe significantly more than the asset is worth, you should consider surrendering the asset, with the result that you have no further obligation to pay.
Co-Signers / Guarantors
In some cases, creditors may have taken a guarantee or had someone co-sign on your behalf and they will have to pay that debt if you go bankrupt. In Many Cases, co-signers and guarantors are family members or persons related to the borrower.
If a person goes bankrupt and you receive a discharge from bankruptcy, you are, as a discharged bankrupt, at liberty to pay back your relatives or any other party you choose. As a discharged bankrupt, you have no legal obligation to pay or reimburse any creditor, however, repayments to a relative after you have received a discharge are gratuitous payments made by you which you are under no legal obligation to make.
Government debts in many cases are treated exactly the same as unsecured debts in a bankruptcy and include Income Taxes, GST and directors’ liabilities for unpaid company debts.
HRDC debts, WCB, or Employment Insurance benefits received while ineligible are treated very differently and monies you received and consumed while you were ineligible survive a bankruptcy and must be repaid, in most cases after you receive your discharge from bankruptcy.