Bankruptcy Exemptions in Canada: What Can I Keep?
What are the Bankruptcy Exemptions?
If you are looking to declare bankruptcy, then it is important to be well-informed about the different aspects of the process including bankruptcy exemptions in Canada.
Bankruptcy is an option you could consider if you have unmanageable debt.
It could be suggested by a Licensed Insolvency Trustee (LIT) as part of your debt management counseling program.
In fact, approaching a LIT should be your first step if you feel your debt has become overwhelming.
The OSB – Office of the Superintendent of Bankruptcy Canada – provides a list of active LITs near you.
A LIT presents the various options available to you to overcome your financial situation.
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If you choose to file for bankruptcy, then the LIT will work with you to fill out certain forms as part of the process.
These forms will then be filed by the LIT with the OSB, upon completion of which, you will officially be declared bankrupt.
Bankruptcy Exemptions in Canada Include Federal and Provincial Exemptions
Once you have formally been declared bankrupt, the LIT is the in-charge that works on your behalf.
The LIT will communicate to your creditors on your behalf.
Any lawsuits filed by your creditors against you will be stopped.
You will not have to make any direct payments to creditors whom you owe unsecured debt (e.g. credit card payments).
Any garnishments (a court summons, warning or other procedure, initiated against the debtor as part of a litigation against the debtor by a creditor).
Upon declaration of bankruptcy, the LIT will inform details of such declaration to all your creditors.
Assets, including the ones you procured during the bankruptcy period, are sold by the LIT.
The money made by the sale of these assets is set up as a trust by the LIT to enable settlement for creditors.
Assets that are exempted under Federal law and the laws of the respective province or territory of your residence, are exempted in the process.
Purpose of Bankruptcy Exemptions of Canada
Even though assets are sold by the LIT when you declare bankruptcy in Canada, there are some assets that you can still retain after such declaration.
These assets are referred to as Bankruptcy Exemptions, in Canada.
The purpose of the existence of such exemptions is goodwill.
The Canadian Law wants to ensure that an honest debtor has a reasonable foundation to rebuild his or her life after bankruptcy.
Therefore, certain assets, usually those required to rebuild one’s life and financial future, are exempted under the Canadian law.
This enables the unfortunate debtor to have access to reasonable means to restart a new life.
With bankruptcy exemptions in Canada, it is possible for an honest debtor to resume a life of dignity even after bankruptcy, and build a life for oneself and dependents.
Details of Assets Included in Bankruptcy Exemptions in Canada
The Bankruptcy and Insolvency Act, which is governed by Canada’s Federal Law, specifies the following Bankruptcy exemptions:
- Assets held by you in trust for other people.
- GST credit payments.
- Payments related to expenses on essential needs for your family.
- Other assets that are exempted under the law of the territory or province where you live.
- Assets exempted under bankruptcy in Canada usually include livelihood essentials.
Some of them include:
- Food and heating equipment essential for your family and other dependents.
- Clothing for you and your dependents.
- Primary residential property (even a mobile home counts), furniture, appliances, and car.
- Trade tools, including books and equipment.
- A motor vehicle; in some cases, such allowance is permitted only if the vehicle is needed to earn a livelihood.
- Pension or retirement savings.
- Farmland including animals, supplies and equipment therein.
- Health-enabling assets.
- Items that carry a sentimental value for you.
Note that only one of Trade Tools and Farmland assets apply.
In most cases, tools related to your primary occupation are considered exempted assets.
The list stated above may include more exemptions depending on the province or territory you live in.
The limit on the value of such exemptions too is governed by the laws of the province or territory where you reside.
Assets such as cars are required to undergo an appraisal first for value assessment.
Certain assets, though exemptions, have severe value limits as a result of provincial and territorial laws.
In case of assets like houses, the limits set on their values are so low that bankrupt individuals often end up selling the houses to pay the surplus value to creditors.
Key Factors Related to Bankruptcy Exemptions in Canada
- Bank accounts owned by you do not come under Bankruptcy exemptions in Canada. However; it is important that you manage your accounts with diligence so that no money gets transferred to your creditors.
It is for this reason that LITs usually recommend opening of a new bank account before you declare bankruptcy.
They usually recommend a bank where you have no transaction history, including credit card payments.
The reason: When you fail to make a credit card payment, it becomes easy for your credit card company to instruct the bank for a debit from your account if you have financial transactions and credit card from the same bank.
Even if you do not own a credit card of the bank from where your current account operates, it is still possible for the card company to debit money if you have given such standing instruction.
- Opening a new account should not be a problem because banks cannot hold bankruptcy as a reason to disqualify you as a potential account holder.
- According to the Canadian Bankruptcy laws including the Bankruptcy and Insolvency Act, you can stop creditors from debiting your account. You have the right to do so. Your LIT can guide through the process.
- It is important to have your regular deposits such as salary transferred to the new account immediately before you declare bankruptcy.
- In case a mortgage is attached to your home or car, then Canadian law allows exemption on the equity. The equity amount is the value derived after deducting your payable debt amount from the value of the asset.
Again, the limit on the extent of exemption depends on the province or territory you live in.
Thus, for example, if the equity amount on your car amounts to $4, 000 and your state offers an exemption of value $5, 000, then it means you can keep your car.
Your unsecured creditors – lenders from whom you have borrowed without offering a collateral – have no right to seize the vehicle.
However, the secured creditor – lender that offered you a loan against the mortgage – has the right to seize your vehicle.
This right holds even if you have made regular payments to the creditor on the mortgage.
You need the guidance of a professional, usually a LIT, to make you understand the law, and put it to best use to save your assets from unnecessary seizure.
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