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What Happens to Different Debts in Bankruptcy?

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15 Feb 2021, 18:24 GMT+10

Not all debts are treated equally. Depending on what kind of loan or financial obligation you have to pay, it may be treated differently under debt relief. When you seek relief by filing for bankruptcy, you can see a lot of the money you owe discharged. However, some obligations will remain on the books.

If you're considering filing for bankruptcy in BC, find professional financial help on Vancouver Island and learn more about your options. Learn more about the consequences of filing for bankruptcy and how it will affect your financial future. Only a licensed insolvency trustee can assist you with this kind of debt relief.

Filing Bankruptcy for Credit Card Debt

Credit card debts, as well as other high-interest loans like payday loans, are the main targets of debt relief. There are a lot of obstacles to repaying them, including high-interest rates, while collection actions such as wage garnishments can make it impossible to meet your everyday living expenses.

Debt relief exists to give you an escape hatch. There are real consequences to filing for bankruptcy, such as the loss of certain assets or surplus income, but it helps you hit 'reset' when your finances become an emergency.

Can You Include Student Loans?

Student loans represent a significant portion of many people's debt loads, especially younger adults. However, they can't be included in bankruptcy proceedings right away. There is a seven-year waiting period between the last day you studied as a full- or part-time student and the date when student debts are eligible for discharge.

Mortgages & Secured Loans

Filing for bankruptcy will only discharge unsecured debts. That does not include any secured loan, which is a loan backed up by collateral. If the lender can seize the asset if you default on payments, you can't include it in debt relief. This will likely include:

  • Mortgages,
  • Auto loans, and
  • Business loans secured with personal assets.

What can you do if you can't afford your mortgage? Your options are somewhat limited. You can speak to your lender before you start missing payments. Banks and credit unions typically want borrowers to keep their homes, and they may offer mortgage payment deferral or a special payment arrangement.

If other debts are the reason you can't keep up with mortgage payments, options like bankruptcy or a consumer proposal can give you room to catch up.

Fines & Other Obligations

There are a number of financial obligations that are not secured debts but cannot be discharged, even if you've fallen behind on payments and still owe money. These include fines such as parking or speeding tickets that are owed to a court, child support, and spousal support payments such as alimony or debts incurred in connection with a divorce agreement.

Tax Debt

What does filing for bankruptcy do to tax debt? Fortunately, in many jurisdictions, taxes owing can be included. Revenue agencies tend to have extensive collection powers and can quickly garnish wages or even take money directly out of your bank account. When this happens, bankruptcy may become your only option before you begin to risk falling behind on your mortgage or everyday expenses.

Take stock of your financial situation before you decide on bankruptcy. If most of your obligations aren't eligible, you may want to look for another solution.

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