Filing for bankruptcy in Canada is often associated with a fear of losing personal assets or having income threatened. However, this is a common misconception. In reality, filing for bankruptcy protection in Canada can help safeguard your assets and income.
Understanding Bankruptcy Protection in Canada
The Bankruptcy and Insolvency Act in Canada provides a stay of proceedings when a person files for insolvency. This stay of proceedings is a significant tool that protects from creditors, including government entities like the Canada Revenue Agency.
As you file for bankruptcy, the stay of proceedings is triggered, legally halting creditors from demanding payment, continuing collections or legal actions, and seizing your assets.
Bankruptcy Protection: Safeguarding Assets
The fear of losing assets is common among individuals considering bankruptcy. However, most people who file for bankruptcy in Canada are able to retain their assets.
Exempt Assets
The provincial laws in Canada provide entitlement to certain assets when you file for bankruptcy, usually referred to as ‘exempt assets’. These assets are protected during bankruptcy. The Court Order Enforcement Act in British Columbia, for example, outlines the bankruptcy protected assets:
- Household Goods and Effects: Up to a $4,000 value, based on garage sale value
- A Vehicle, or Equity in a Vehicle: Up to a $5,000 value; or up to a $2,000 value if you owe child or spousal support payments
- Home Equity: Up to a $12,000 value in Greater Vancouver and Victoria; or up to a $9,000 value elsewhere in British Columbia
- RRSPs: Unlimited value, except for contributions made 12 months prior to filing for bankruptcy
- Clothing and Medical Aids: Unlimited value
- Work Tools (Tools of the Trade): Up to a $10,000 value
Note: Calculating whether an asset is exempt should be done with a qualified Insolvency Estate Manager or Licensed Insolvency Trustee.
Moreover, many life insurance policies and virtually all pension plans are considered exempt assets.
Keeping Assets that Exceed the Allowances
Even if your assets are worth more than the exemption allowances, you don’t necessarily have to surrender them in bankruptcy. Here are a couple of ways you may be able to keep your assets:
- Repurchase of Asset in Bankruptcy: You can pay the non-exempt value of your asset into your bankruptcy estate, allowing you to retain the asset.
- File a Consumer Proposal: A Consumer Proposal consolidates your debts into one settlement and offers your creditors a partial repayment of the debt. In a Consumer Proposal, your assets are not impacted, making it a viable option if you have a significant amount of non-exempt equity in an asset.
Consumer Proposals: An Alternative to Bankruptcy
A Consumer Proposal is the number one alternative to personal bankruptcy in Canada. In a Consumer Proposal, your assets are not impacted, which makes it an appealing option for those with significant non-exempt equity in assets.
Consumer Proposals consolidate your debts into one settlement and offer your creditors a partial repayment of the debt. Your debts may be reduced to 20-50% of the balance with no interest charges and no requirement to surrender assets.
Although a Consumer Proposal isn’t the same as bankruptcy, it does provide the benefit of the stay of proceedings, protecting you from creditors.
Bankruptcy Protection: Shielding Your Income
Filing for bankruptcy in Canada creates a barrier between you and your creditors, hence safeguarding your income from wage garnishments and bank account seizures. Even if a creditor has already started garnishing your income or frozen your bank account, filing a bankruptcy will stop the ongoing garnishment or freeze.
This protection applies to virtually all creditors, including the Canada Revenue Agency. However, one of the few exceptions is the Family Maintenance Enforcement Program collecting on child or spousal support payments, which can continue a wage garnishment despite a bankruptcy filing.
Bankruptcy with No Assets or Income
You don’t need to have any assets to benefit from bankruptcy laws. Many individuals considering claiming bankruptcy have few or no assets. If you have neither income nor assets, you might want to consider a statute of limitations on debt, which could render your debts uncollectable.
Wrapping Up
Filing for bankruptcy protection in Canada can provide you with a financial fresh start. It’s a powerful tool that can protect your assets and income, and stop harassment from creditors. However, it’s important to consult with a local debt expert before making the decision to file for bankruptcy.
