Navigating Through Canadian Bankruptcy: A Closer Look at Exempt and Non-Exempt Assets
Often, the fear of losing all possessions prevents individuals from filing for bankruptcy in Canada. This apprehension, however, is not entirely accurate. Both federal and provincial laws within the country provide exceptions to what gets surrendered upon filing bankruptcy. The Bankruptcy & Insolvency Act even offers an option for retaining all assets.
In this article, we delve into the difference between non-exempt (what you lose) and exempt (what you keep) properties during a bankruptcy. We also explore how assets are dealt with in a consumer proposal.
Understanding Non-Exempt Assets
When you declare bankruptcy in Canada, a portion of your assets might be liquidated to repay the creditors. These assets are labeled non-exempt. The principle behind non-exempt assets is straightforward: if you possess valuable assets and declare bankruptcy, these assets’ value should contribute towards the repayment of debts that would be otherwise pardoned in your personal bankruptcy.
The value of these assets refers to the equity left after paying off any secured loans or registered liens. For instance, if you own a property worth $800,000, with an outstanding mortgage of $675,000, the equity amounts to $125,000. This equity is what gets surrendered, subject to any exemption limits.
Common assets you might have to relinquish include:
- A second car.
- High-value art pieces, coin collections, jewelry.
- Stocks, bonds, and non-protected investments.
- Bank savings exceeding short-term living costs.
- Home equity (based on specific exemptions).
- Secondary residential properties.
- Inheritances.
- Tax refunds on income until the filing date.
What Constitutes Exempt Assets?
Bankruptcy doesn’t aim to be punitive. Hence, you don’t lose everything upon filing for bankruptcy. Certain assets, as listed by federal bankruptcy laws and provincial exemption laws, are exempt from seizure.
Federal exemptions, as per Section 67(1) of the Bankruptcy & Insolvency Act, include:
- Property held in trust for another person.
- Assets exempt by provincial laws.
- GST / HST tax credit payments.
- RRSP, RRIF.
- RDSP savings (as ruled by courts).
- Special-needs related payments.
The value of these assets is based on equity and resale or liquidation value — the price you could fetch at a garage sale. Consequently, most individuals filing bankruptcy in Canada retain their personal belongings and household furnishings.
Exemptions Across Provinces
Each province has its own laws defining which assets cannot be seized. Below is a list of bankruptcy exemptions by province:
- Alberta
- British Columbia
- Manitoba
- New Brunswick
- Newfoundland
- Nova Scotia
- Ontario
- Prince Edward Island
- Quebec
- Saskatchewan
- Yukon
- Northwest Territories
- Nunavut
Impact on Home and Vehicle
Considering that secured debts like your mortgage or car loan are not part of a bankruptcy, understanding their rights on your assets is crucial. It is possible to declare bankruptcy and keep your car.
Non-Exempt Assets: Bankruptcy vs. Consumer Proposal
A consumer proposal is a popular alternative to personal bankruptcy in Canada. It offers debt relief and legal protection from creditors, similar to bankruptcy. However, in a consumer proposal, you can retain all your assets, including non-exempt ones.
A consumer proposal is a legal agreement that settles your debts for less than the owed amount. In return, you agree to make pre-arranged payments to clear the settlement amount. While you don’t lose assets in a proposal, the value of your non-exempt assets affects the offer you need to make to your creditors.
Consumer proposals are simpler than bankruptcies, with terms decided upfront. Your payments can be spread over five years, making monthly payments more affordable than bankruptcy if you have substantial non-exempt assets you wish to keep.
Bankruptcy isn’t punitive. Instead, it eliminates most of your unsecured debts, offering you a fresh start. To understand which assets you might keep or lose, or to decide between filing bankruptcy or a consumer proposal, consider booking a free consultation with a Licensed Insolvency Trustee.
Conclusion
The decision to declare bankruptcy should not be guided by the fear of losing everything. Understanding the difference between exempt and non-exempt assets can help you make an informed decision. Whether it’s bankruptcy or a consumer proposal, the ultimate goal is to provide you with financial relief and a fresh start.
