Answering Common Questions Regarding Loss of Assets During Bankruptcy Proceedings
Contrary to popular belief, declaring bankruptcy does not mean you have to give possession of everything you own to the Licensed Insolvency Trustee (LIT). While the LIT must take possession of certain assets on behalf of your creditors, there are some assets that you are allowed to keep. These assets are said to be “exempt” from the LIT’s duty to take possession of a bankrupt’s assets. Exemptions vary, depending on which Canadian province or territory you reside in.
What is Bankruptcy?
Bankruptcy is a legal process you can choose to enter into if you have unsecured or secured debt that you cannot pay.
Discharge from/completion of, bankruptcy will terminate most, if not all, of your debts. However, in exchange for the elimination of your debts, the LIT must, by law, seize and sell assets that are not exempt from this law.
What Might I Lose If I File for Bankruptcy?
Bankruptcy law states that once you file for bankruptcy, your assets must be taken by the LIT, and turned into cash for payment back to your creditors. In fact, by law, upon filing for bankruptcy, all of your assets and property become part of the bankruptcy estate. Your deed and ownership automatically pass to the LIT. However, once this has occurred, the LIT is permitted to then allow bankrupts to retain assets that are exempt from this rule.
Here are examples of assets that would likely not be considered exempt:
- A property that isn’t your primary home
- A vehicle with equity in it in excess of $6,600
- Musical instruments that are not required for your business
- A stamp or coin collection
- Cash and investments
- Expensive designer clothing
- Valuable jewelry
The good news is that you can keep some, if not all, of your possessions when you file for bankruptcy.
The Bankruptcy and Insolvency Act is a federal statute. It, along with other federal statutes, and provincial legislation describe what assets are exempt from the LIT’s duty to seize and sell.
Here are examples of assets that would likely be exempt from seizure by the LIT:
- Heating fuel
- Health aids
- Necessary clothing
- Furniture and appliances to a maximum value of $13,500
- Your car, if the equity in it is less than $6,600
- Your home, in some instances
- The tools of your trade or profession to a maximum value of $11,300
- Farming animals, equipment, and supplies to a maximum value of $29,100
- Registered pension plans
- Most insurance policies
Changes to the Bankruptcy and Insolvency Act have also made it possible for you to retain RRSPs, RRIFs and DPSPs, with the exception of contributions made in the 12 months preceding the date of filing for bankruptcy.
Can I Lose My House?
In Ontario, if the equity in your home does not exceed $10,000, you can keep your home provided you keep up the mortgage, insurance, property tax and utility payments, and you have not defaulted on the mortgage agreement.
If your equity exceeds $10,000, you will have to reach an agreement with the LIT to buy back the equity or move out to permit the LIT to sell the home.
What About My Bank Account?
Your bank account is not an exempt asset. However, that doesn’t mean your account balances will be seized by the LIT. It is accepted professional practice for LITs to enquire about bank account balances and permit bankrupts to retain enough funds to pay for a month of living expenses.
Can I Still Keep My Car? What Happens If It Is Leased or Financed?
Most people who file for bankruptcy in Ontario are able to keep a vehicle.
Ontario law states that equity in a vehicle up to $6,600 is exempt from seizure. Therefore, if your vehicle is worth less than $6,600 it is automatically exempt. If it is worth more than $6,600 the LIT will usually not seize it provided an agreement is made to pay the equity in excess of the $6,600 exemption to the LIT.
What if your car is leased or financed? If you lease or finance your vehicle when you file for bankruptcy, it will not be seized, as long as you are able to continue making your car loan or lease payments and there is less than $6,600 of equity in it. If the equity exceeds $6,600, a payment arrangement for the equity in excess of the $6,000 exemption can usually be made with the LIT.
While there are many benefits to filing for bankruptcy, there are also other rules and implications that should be considered before making the decision to file.
A Licensed Insolvency Trustee will explain to you the debt relief solutions and options that can help you, and will assist you during the bankruptcy or Consumer Proposal process.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee based in Ottawa. We service Ottawa and most of eastern Ontario. We have helped thousands of ind26ividuals and couples successfully resolve their debt challenges since 2002. Its passion – its mission – is your health and well-being!