In Ontario, you’re protected by the Ontario Collection and Debt Settlement Services Act (the “Act”). The Act sets out strict laws on what a debt collection agency can - and cannot - do. Among other things, it attempts to curb collection agencies from using harassing or intimidating tactics to get you to repay the debt you owe. Here's what this law covers.
Are you struggling to pay your bills? Are you sick of dodging calls from collection agencies? Are you feeling completely exhausted and defeated by your finances?
If you’re unable to make your debt payments and you’re at the point where you are contemplating Bankruptcy, it’s important to understand which of your debts will be eliminated.
There is a misconception that Bankruptcy will wipe out all of your debt. Unfortunately, this is not the case. If you are considering Bankruptcy, reach out to a Licensed Insolvency Trustee (LIT) as soon as possible to discuss your debt management options. A LIT can explain exactly which of your secured claims and unsecured claims will be eliminated and which claims you will need to pay. They will also help you determine if Bankruptcy is the right choice for you.
Types of Creditors
Before getting into the details of which debts are eliminated in Bankruptcy and which creditors you will need to repay, let’s start with the basics.
What is a creditor?
A creditor is the person or company that you, the debtor, owe money to. If you have student loan debt and credit card debt, then your creditors are the student loan lender and the credit card company.
In the context of Bankruptcy, there are two types of creditors — secured and unsecured creditors.
A secured creditor lends credit that is backed by collateral. The collateral acts as a form of security to the lender. In the event that you, the borrower, defaults on the loan, the secured creditor can retrieve some of the losses in the form of collateral.
For instance, a home mortgage is a type of secured loan with the collateral being your home. Another type of a secured loan is a car loan. In this case, your car is the collateral. You fail to make your car payments then eventually, the creditor can take your vehicle.
The benefit of a secured loan is that you can typically get a higher borrowing amount as well as a lower interest rate because you are backing up the deal with collateral. The drawback of obtaining a secured loan is that the approval process can take longer than it might with an unsecured loan.
Examples of secured credit
- Home equity loan
- Home equity line of credit (HELOC)
- Auto loan
- Equipment loan
- Secured credit card
An unsecured creditor lends credit without the security of collateral. One type of unsecured loan is credit card debt. If you default on your credit card debt, the unsecured creditor can’t recoup any of their losses because you have not put forth any collateral. This is why credit card interest is typically so high. Without collateral, creditors are taking on an increased risk so they charge higher interest to cover themselves. The benefit of an unsecured loan is that it can typically be quicker and easier to obtain.
Examples of unsecured credit
- Student loans
- Personal loans
- Unsecured credit card
- Payday loans
- Unpaid bills
Secured vs. Unsecured Claims in Bankruptcy
If you are considering Bankruptcy, the distinction between secured and unsecured claims is an important one.
Secured claims are not included when you file for Bankruptcy. If, for instance, you have a secured car loan and you file for Bankruptcy, the loan provider can take possession of the car and sell it in an attempt to regain their losses.
However, if you file for Bankruptcy but you continue to make your car loan payments, you get to keep your car. The car loan company can not terminate your loan in response to you filing for Bankruptcy.
Bankruptcy will eliminate most of your unsecured debts. Some of the unsecured loans that will be eliminated in Bankruptcy include:
- Credit card debt
- Retail store cards
- Line of credit
- Bank loans
- Payday loans
- Installment loans
- Individuals loans
- Past due bills
Your unsecured debts are further broken down based on priority claims. The priority rankings are outlined in section 136 of the Bankruptcy and Insolvency Act. According to the Act, preferred creditors will be paid before regular unsecured debt. Examples of priority claims include unpaid wages or municipal taxes.
Some unsecured debts that are not eliminated in Bankruptcy, these include:
- Student loans. If you’ve been out of school for less than seven years then your student loans will not be eliminated in Bankruptcy. If you have been out of school for more than seven years then your student loan will be eliminated.
- Child support or alimony. Bankruptcy will not eliminate your obligation to make child support or alimony payments.
- Court fines and penalties. Any fines or penalties that have been imposed on you by the court will not be eliminated.
- Debt due to fraud. If you accumulate debt through fraudulent behaviors (writing a bad cheque, or taking out a credit card under a false pretense) this will not be eliminated in Bankruptcy.
Talk to a Licensed Insolvency Trustee to Explore Your Options
Bankruptcy is not a decision that most people take lightly. It’s often the last resort when you simply can’t find another way out of financial trouble. While the thought of filing for Bankruptcy might leave you feeling totally defeated, it’s important to recognize that Bankruptcy can also help to provide an opportunity for a fresh financial start.
If you have a lot of secured debt then Bankruptcy won’t give you a completely clean slate. You will still be on the hook to pay for your secured claims. However, Bankruptcy may be able to alleviate some of your unsecured debts, giving you more money to pay off your secured creditors. You can speak with your LIT about your debt management options. In some circumstances, a Consumer Proposal might be a better option.
If you are drowning in student loans, credit card debt, and past due bills, reach out to a Licensed Insolvency Trustee to discuss your options. A LIT is the only professional in Canada authorized to administer a Bankruptcy. You don’t have to navigate this alone. Reach out to us at Adamson and Associates at 519-310-JOHN for a no-obligation consultation and take the first step to get your financial life back on track.