What You Need To Know About Inheritances and Other Windfalls in Bankruptcy
If you’re considering filing for bankruptcy, it’s highly likely you’re running low on liquid assets or you’ve already exhausted any savings you had.
Before you decide to file for personal bankruptcy, however, it’s important to consider what would happen if you came into money or received additional assets while the process was underway.
When you file for bankruptcy, you sign over your interest on the things you own.
In other words, your assets can be seized in order to pay off some or all of your debts.
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In reality, however, many assets are exempt from the bankruptcy process, so you could retain all of your property when you declare yourself bankrupt.
However, when you file for bankruptcy and sign over your interest on the things you own, you aren’t just signing over your interest on the things you own on that particular day.
You’re actually signing over your interest on anything you may come to own before the bankruptcy is completed.
If you file for bankruptcy and win the lottery a week later, for example, some or all of your funds could be seized so that your unsecured creditors can be paid.
Similarly, if you receive an inheritance or are gifted an asset, such as a brand-new vehicle, the bankruptcy rules will mean that your new assets can be seized.
Assets that come to you after you’ve filed for bankruptcy but before the bankruptcy is completed are known as ‘after-acquired property’.
Although it’s not particularly common for people to suddenly find themselves in receipt of high-value assets, it is something you should consider before making a decision to file for bankruptcy.
Protecting Your Windfall
If you receive after-acquired property, the law states that you are required to tell your Licensed Insolvency Trustee (LIT).
Failure to do so will breach the terms of your bankruptcy and may prevent it from being discharged.
However, this doesn’t mean you can’t protect any potential windfalls you receive after filing for bankruptcy.
If you’re likely to receive a windfall in the near future, you may prefer to file a consumer proposal instead.
As the rules regarding windfalls only apply to consumer proposals and not bankruptcies, this could be an effective way of protecting your new assets.
Furthermore, if you’ve already filed for bankruptcy and you’re made aware that a windfall could be coming your way, you could ask your trustee to file a consumer proposal instead.
This would effectively cancel the bankruptcy and, providing your consumer proposal is accepted, will enable you to avoid your new assets from being seized.
Remember – the rules regarding bankruptcies and windfalls don’t apply to work-related income.
If you receive a bonus at work, this would be dealt with under the surplus income rules instead.
Access Advice Today
As you can see, the rules regarding bankruptcies can be complex, so it’s always best to seek bespoke advice before making any decisions.
To discuss debt solutions in more detail, contact us at Bankruptcy Canada today.
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