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Not all debtors get a fresh start after bankruptcy

Bankruptcy law makes possible the financial rehabilitation of bankrupt individuals by discharging them from the burden of past debts upon the equitable distribution of their assets among their creditors. One of the primary purposes of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (the “BIA”) is to give honest but unfortunate debtors a fresh start in circumstances where it is prudent to forgive the debt or liability that resulted from inadvertence, negligence, or incompetence.

When an assignment in bankruptcy is made, a bankrupt surrenders their assets in exchange for the discharge of their unsecured debts from sources such as credit cards, unsecured lines of credit and past due bills. Secured debts, those which are guaranteed by some form of property or collateral, such as a mortgage on land or the financing of a motor vehicle, will not be discharged on bankruptcy. There are also several debts set out in the BIA that will not be discharged on bankruptcy, as they arise from or contain an element of wrongdoing or activity that may be considered reprehensible.

Section 178 of the BIA sets out a list of debts that survive a discharge from bankruptcy. These types of liabilities will not relieve a bankrupt from their obligation to repay such a debt, even after being discharged from bankruptcy. The basis is that debts that fall within the scope of the provision are based on an overriding social policy where the repayment of the debt far outweighs any possible benefit to the bankrupt from being relieved of their past liability. Courts have found that section 178 of the BIA is a complete code in that it sets out which debts will survive a discharge from bankruptcy.

An order of discharge from bankruptcy will not release a bankrupt from debts arising from a fine, penalty, restitution order or debts of a similar nature imposed by a court, debts for alimony, spousal and child support, certain student loan debts, and debts arising out of fraud, embezzlement, misappropriation, defalcation or fraud. Typically, these types of debts will survive a bankrupt’s discharge from bankruptcy.

Subsections 178(d) and (e) of the BIA are based on what can be classified as morality concepts that refuse to allow a bankruptcy to shelter the dishonest conduct or activity perpetrated by bankrupt prior to making an assignment. The idea behind these provisions is based on the fact that a bankrupt should not be rewarded for conduct that amounts to wrongdoing, dishonesty or misconduct. To permit a bankrupt’s debt that arises from this type of conduct to be discharged from bankruptcy would reward such wrongdoing and enable bankrupts to shield themselves from liability.

When a bankrupt is discharged from bankruptcy, they are released from their obligation to repay past debts that existed on the day in which the bankruptcy was filed. Generally, a bankrupt will be discharged from bankruptcy nine months after the bankruptcy is filed if, this is their first bankruptcy, they have attended two financial counseling sessions, the bankrupt is not required to pay a portion of their income into the bankrupt estate and the discharge is not opposed by a creditor, licensed insolvency trustee or the Office of the Superintendent of Bankruptcy.

Bankruptcy law can be complicated and decisions should be made in accordance with advice provided from a bankruptcy lawyer who will only act in the bankrupt’s best interests.

For more information or consultation, please contact Daniel Litsos in our Bankruptcy and Insolvency group.

This article is not intended to serve as a comprehensive treatment of the topic and is not legal advice. All legal matters are dealt with pursuant to their specific facts and circumstance. Nothing replaces retaining a qualified, competent lawyer.