How Bankruptcy Protects Personal Assets
Many people avoid bankruptcy for as long as they can because they worry that it will put their assets (like their home) or income at risk.
The truth, however, is that filing does the precise opposite.
In Canada, bankruptcy is a tool you can use to maintain your wealth and continue living where you are, even if you owe creditors a lot of money.
It Offers A Stay Of Proceedings
When you owe creditors money and don’t file for bankruptcy, they will use all legal means to recover the debt.
At first, you’ll get phone calls and letters demanding repayment.
Then, if you still can’t pay the money you owe, creditors will start making arrangements for collection.
Actions include getting third-party agencies to seize assets and garnish wages.
People who find themselves in this situation often lose significant chunks of their income.
Sometimes they even wake up to find vehicles missing from their drives.
Bankruptcy, however, stops all of this by providing clear rules for what creditors can seize, and what they can’t.
A stay of proceedings is a kind of ceasefire that triggers as soon as you file for bankruptcy.
From this point onwards, creditors are only allowed to communicate with you via your licensed insolvency trustee.
They cannot continue to ask you for payment directly.
And they cannot escalate collection proceedings or seize your assets.
For many people, therefore, bankruptcy is a great way to hold onto wealth.
It protects you from lenders who are about to take collection action or have already begun to do so.
Thus, bankruptcy provides you with much-needed respite.
What Assets Can Creditors Take During Bankruptcy?
The prevailing belief is that bankruptcy leaves you penniless and destitute, but the opposite is true.
Canadian law specifies strict rules on what creditors can seize, and what they can’t.
The regulations state that some assets are “exempt,” meaning that lenders can’t help themselves to satisfy debt repayments.
In short, you get to keep them.
Rules vary from province to province. But in British Columbia, the following rules apply under the Court Order Enforcement Act:
- Protection of household goods and effects up to $4,000 based on second-hand market sale value, not cost to replace.
- Home equity up to $12,000 in Victoria and Greater Vancouver, and up to $9,000 elsewhere.
- Work tools (sometimes called tools of the trade) up to $10,000 (as measured by their resale value).
- Vehicles and equity in vehicles up to $5,000 or $2,000 if you’ve failed to make child support payments.
- RRSP up to an unlimited amount (except for contributions you make in the 12 months running up to the date you file for bankruptcy).
- Medical equipment and clothing up to an unlimited value.
As you can see, bankruptcy offers considerable protection and helps you avoid radical changes to your lifestyle.
Importantly, it protects you from destitution.
You will not lose all of the equity you’ve built up in your house or car.
And you will get to keep the tools and products you need to continue operating your enterprise (if you’re self-employed).
In most cases, you can keep living in your current dwelling.
What Happens to Non-Exempt Assets?
You may worry that bankruptcy will result in the loss of non-exempt assets or equity that falls outside of the prescribed thresholds.
Again, however, you have options.
Option 1: Rephrase Bankruptcy Assets
When you file for bankruptcy, you create a legal category called the bankruptcy estate.
You can think of this as a big pot into which you put all the debts you owe.
Sometimes, creditors will be able to get some of their money back by seizing assets that fall above the threshold.
But in other cases, you may be able to retain possession of the asset by coming to a repayment agreement with your creditors.
Suppose you have $6000 in vehicle equity.
Bankruptcy rules protect $5,000 of that amount, so creditors can legitimately seize the remaining $1,000.
Following bankruptcy, however, you may be able to come to an arrangement where you pay the remaining $1,000 in small monthly instalments until the court discharges your case.
This way, you can keep your vehicle for work or leisure purposes, protecting your quality of life.
Option 2: File A Consumer Proposal
Consumer proposals are similar to bankruptcies because they reduce the amount of debt you owe and protect your assets.
Here you negotiate your debts down with creditors under the threat of bankruptcy.
Lenders will usually vote to reduce the amount of money you owe, making repayments more manageable.
And they won’t attempt to seize your house, car or possessions, so long as you abide by the terms of the agreement.
Can Bankruptcy Protect Your Income?
So far, our discussion has focused on how bankruptcy can protect your physical and financial assets.
It turns out, though, that it can ring-fence your income too.
Creditors will often engage in wage garnishment or bank account freezing to recover the money you owe them.
Filing for bankruptcy puts a stop to this and creates clear rules for what they can and cannot take.
If your wages are below the surplus income threshold for your particular circumstances, you might not need to pay creditors any money from your income after the bankruptcy date.
If you earn more than the limit, you’ll have to pay half of this amount until the courts agree to discharge you, which can take as little as nine months.
Please note that bankruptcy cannot protect your income from the Family Maintenance Enforcement Program.
Wage garnishment may continue if you need to make spousal or child support payments.
Can People Who Have No Assets Or Income File For Bankruptcy?
Under Canadian law, you’re still able to file for bankruptcy, even if you have no assets or income.
In some cases, the law protects people from debts that creditors cannot collect.
If you are considering bankruptcy, please speak with a licensed insolvency trustee.
They can show you your options and help protect your personal assets.