What Is The Difference Between Exempt & Non-Exempt Assets?
Bankruptcy can be a daunting prospect, primarily due to the fear of losing all of one’s property. However, a deeper understanding of the Exempt vs. Non-Exempt Assets in a Bankruptcy in Canada can alleviate some of these fears. This article aims to provide a thorough explanation of what assets are kept and lost in a bankruptcy scenario, as well as how assets are treated in a consumer proposal.
Understanding Non-Exempt Assets in Bankruptcy (What You Lose)
In the event of bankruptcy, certain assets may be liquidated to repay the creditors. These are known as non-exempt assets. 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 otherwise be forgiven.
The worth of non-exempt assets is calculated based on equity after deducting any secured loans or liens. For instance, if your house is valued at $800,000 and your mortgage is $675,000, your home equity is $125,000. This equity is surrendered, subject to any exemption limits.
Typical non-exempt assets that may be surrendered include:
- Secondary vehicles;
- Precious artworks, coin collections, jewellery;
- Non-protected stocks, bonds and investments;
- Excess cash in the bank beyond necessary living expenses;
- Home equity (subject to specific exemptions);
- Secondary or vacation properties;
- Inheritances;
- Tax refunds up to the date of filing.
Grasping Exempt Assets in Bankruptcy (What You Keep)
Despite popular belief, bankruptcy is not intended to be punitive. Therefore, not all assets are lost in bankruptcy. Both federal and provincial laws in Canada provide a list of assets that are exempt from seizure. These are known as exempt assets.
Exempt assets as stated in Section 67(1) of the Bankruptcy & Insolvency Act (BIA) include:
- Property held in trust for another person;
- Property exempted by provincial laws;
- GST / HST tax credit payments;
- RRSP, RRIF;
- Courts-determined RDSP savings;
- Certain special needs payments.
The exemption values are based on equity after any amount owing. Most personal belongings and household furnishings are usually kept in most bankruptcy cases across Canada.
Provincial Exemptions in Bankruptcy
Each province in Canada has its own set of laws that restrict the seizure of certain assets. A comprehensive list of these exemptions can be found in the respective provincial legislation.
Dealing with Home and Car in Bankruptcy
Secured debts, such as your mortgage or car loan, are not included in bankruptcy, and thus, their rights significantly affect the assets you own. It is possible to declare bankruptcy and retain your car.
Non-Exempt Assets in Bankruptcy vs. Consumer Proposal
A consumer proposal is a popular alternative to personal bankruptcy. It offers debt relief and legal protection from creditors, stopping collection calls, wage garnishments, and lawsuits. The key difference is that in a consumer proposal, you retain all your assets, including non-exempt ones.
A consumer proposal is an agreement to settle your debts for less than you owe in exchange for scheduled payments to pay off the settlement amount. While you do not lose assets in a proposal, the non-exempt assets’ value will influence how much you need to offer your creditors.
Consumer proposals are simpler than bankruptcies and the terms are determined upfront. Payments can be spread over up to five years, making it more affordable if you have significant non-exempt assets you wish to retain.
Conclusion
The goal of filing for bankruptcy or making a proposal to creditors is to attain debt relief when you are unable to pay off what you owe. Bankruptcy is not punitive; it eliminates almost all unsecured debts and allows you to start fresh. To determine which assets you may keep or lose, or whether you should file for bankruptcy or a consumer proposal, consider booking a free consultation with a Licensed Insolvency Trustee.
