What Happens to Assets That Are Jointly Owned in a Bankruptcy Proceeding?
When you file for bankruptcy, you risk losing assets such as your house or vehicle. But what if these assets don’t just belong to you? What happens to assets you co-own with your spouse? Or the family cottage that you co-own with parents or siblings?
To help you better understand the impact that bankruptcy can have, we’ll explain how assets that are jointly owned with a spouse, family member, or another individual will be affected and discuss alternatives to bankruptcy that do not put assets at risk.
About the Bankruptcy Process
Bankruptcy is a legal process for eliminating unsecured debt. It is available to folks who are insolvent. This means they have insufficient assets, if they were sold, to pay their debts and/or they cannot reasonably make the agreed upon payments to their creditors.
Completing the bankruptcy process will terminate, extinguish, most, if not all, of your debts.
In exchange for eliminating your debts, you must work with a Licensed Insolvency Trustee (LIT) who will oversee the bankruptcy process. This includes seizing any non-exempt assets (assets that creditors or a LIT cannot seize) and placing them up for sale, or selling them back to you, to pay your creditors.
Bankruptcy’s Impact on Joint Assets
But what if these assets are jointly owned? This is where things can get complicated.
While there are certain asset exemptions, jointly owned assets such as homes are often not one of them, depending on how much equity is in the asset. This means that if you are not the sole owner of your home or other assets of value, the decision to file for bankruptcy is something that should be made very carefully, taking into consideration the interests of all parties involved.
Matrimonial Home and Real Estate
Laws in each province, and the federal Bankruptcy and Insolvency Act, state which assets are exempt from seizure in bankruptcy.
In Ontario, if there is less than $10,000 of equity in your home – regardless of whether it is jointly owned – you may keep it and the equity is exempt, if you are able to continue making the mortgage and other home related payments.
But, if the equity in your home is more than $10,000, the LIT is required to recover your equity in it. This can be done by the LIT selling it with the other joint owner to a new owner, or the LIT selling your equity to you or your spouse.
Home Owned with Former Spouse
Let’s say you have recently separated from your spouse and are in the process of separating.
Oftentimes, when separated couples have not yet concluded a property settlement, the matrimonial home they lived in has not yet been sold. During this time, one spouse typically continues to live in it, pending the formal distribution of the marital assets.
But if one spouse files for bankruptcy, what happens to the home you once shared together?
If you file for bankruptcy prior to finalizing a property settlement, your interest in non-exempt jointly owned assets will vest in/be transferred to the LIT to be sold or realized upon for the creditors. This includes your share of the house you own with your former spouse, even if you are no longer living in it.
If your ex-spouse is living in the jointly owned home, and the equity exceeds $10,000, your ex-spouse can work with your LIT to reach an agreement to purchase your share of the equity in exchange for sole ownership of the home.
If the home will be sold as per the terms of a property settlement, the LIT will seek to work with your ex-spouse to sell the home to a new owner.
If your ex-spouse is living in the home, and will not cooperate with the LIT, the LIT will likely register its interest in the home in the land registry system, and wait for the home to be sold or re-financed, at which time your ex-spouse will have to reach a settlement with the LIT for your equity.
In most cases, you will likely be able to keep your vehicle during bankruptcy. In Ontario, your vehicle is exempt from seizure if there is less than $6,600 of equity (used vehicle value less the mortgage owed) in it. So, if your vehicle is worth less than $6,600, it is automatically exempt. If your car is worth more than $6,600, and you wish to keep it, the LIT will likely not seize it. Instead, an agreement will be made with you, or your spouse, to pay the equity that exceeds $6,600 to the LIT.
If you lease your car, you wish to retain it, you can afford the payments, and the lease has been properly registered with the Ontario government lien registry, the vehicle will not be seized by the LIT, as you do not own it.
Accounts such as RRSPs, RESPs, and bank accounts are often a big concern for spouses when one partner is considering bankruptcy. Here is what you can expect if you have any of the following with your spouse:
- RRSPs. Registered savings like RRSPs and pensions cannot be held jointly and are protected from bankruptcy in Ontario. This means they cannot be seized except for RRSP contributions made in the 12 months preceding the bankruptcy. In the case of a Spousal RRSP, if the account’s registered owner files for bankruptcy, contributions made in the 12 months prior to bankruptcy will be seized by the LIT. The LIT will likely be agreeable to selling back to you the last 12 month’s contributions.
- RESPs. In Ontario, Registered Education Savings Plans (RESP) are subject to seizure by the LIT. So, if you and your spouse jointly own a RESP, and you file for bankruptcy, either you or your spouse may want to reach an agreement with the LIT to buy-back your joint interest in the plan. This can be done either as a lump sum or be added to your monthly bankruptcy payments.
- Bank Accounts. While bank accounts are not considered an exempt asset, your full account balance will likely not be seized. It is common for the LIT to allow bankrupts to keep a reasonable amount of funds in their account to pay for living expenses such as rent, groceries, and other living costs.
It’s not uncommon for siblings or other family members to co-own a vacation property, such as a cottage together. But, as anyone who has entered this kind of arrangement will know, complications can arise when there are multiple owners of a property. Especially, if one owner files for bankruptcy.
If a property is jointly owned by multiple individuals, only the bankrupt’s share of the equity must be paid to the LIT, on behalf of the creditors.
Typically, what happens in this type of situation, is that once the bankrupt’s share of the equity is calculated, the non-bankrupt owners will have the opportunity to buy the equity from the LIT.
If all parties cannot come to an agreement, the LIT may consider obtaining a court order to put the property up for sale to recover the bankrupt owner’s equity. The LIT could also register its interest in the cottage or property in the land registry system, and then wait for the property to be sold or re-financed, at which time the other owners would be compelled to address the LIT’s interest.
Keep Any Joint Assets with a Consumer Proposal
If you have found yourself in a situation where you are unable to pay your debts, but are concerned about how your spouse, or anyone else you co-own assets with could be affected, consider a consumer proposal, instead of bankruptcy.
A consumer proposal is a debt relief solution that allows you to come to a settlement agreement with your unsecured creditors to avoid bankruptcy. Under the terms of a consumer proposal, you will be permitted to pay back a reduced amount of principal debt you owe, interest-free, within a time frame (no longer than 5 years), as agreed to by you and your unsecured creditors. And the best part, unlike bankruptcy, is that your assets will not be seized as a part of the consumer proposal process. The consumer proposal is drafted and administered by a LIT, acting as a consumer proposal administrator.
If you are seeking relief from your debts and you are unsure of your best course of action, speak with a Licensed Insolvency Trustee to learn more about your options.
Baker Tilly Ottawa Ltd. is a professional debt management firm and Licensed Insolvency Trustee. Since 2002, we have assisted thousands of individuals and couples find relief from financial stress. Our mission – our passion – is your health and well-being!