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Bankrupt faces resurrected mortgage debts following discharge

The bankruptcy process is generally considered a means for a person facing an overwhelming debt burden to obtain a "fresh start" through the release of their debts upon discharge from bankruptcy. The Bankruptcy and Insolvency Act prescribes a number of exceptions to that principle, and a recent decision out of Alberta serves as a stark reminder that a bankrupt's conduct can also cause a debt to survive bankruptcy, or even be revived.

In Servus Credit Union v Sulyok, the bankrupt and his spouse had granted a mortgage to Servus Credit Union ("Servus") which provided that they would be responsible to pay any deficiency on the mortgage. The bankrupt separate from his spouse in 2015, and for the next two years the spouse lived in the house and made all payments. During that time, the debtor assigned himself into bankruptcy and obtained his discharge from bankruptcy. After his bankruptcy, there was a default in the mortgage, but the debtor notified Servus he was going to move into the house, and made payments towards the default.

The debtor subsequently determined he would stop making payments, told Servus, and Servus commenced foreclosure proceedings, ultimately selling the house but leaving a deficiency owing on the mortgage. Servus claimed the debtor was liable to pay, but the debtor claimed his liability to pay had been released through his previous bankruptcy.

The debtor was successful at first instance, but Servus was successful on appeal. The Alberta Court of Queen's Bench, hearing the appeal, determined that by residing in the house and making payments to Servus after his discharge from bankruptcy, the debtor had affirmed the mortgage contract, including his responsibility to pay the deficiency, and that discharge did not prevent that.

Bankrupts who after bankruptcy seek to enjoy the benefits of contracts and agreements made before bankruptcy may find themselves once again required to uphold their end of the bargain, notwithstanding the apparent discharge of their debts in the meantime. Anyone in such a situation would be wise to seek the advice of experienced insolvency counsel well in advance of doing anything that could bring their old debts back to life.

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