It’s not uncommon for family members or friends to jointly own a vacation home or cottage. However, what happens when one co-owner faces significant financial distress leading to bankruptcy? This scenario raises valid worries about the future of the shared property and its fate in bankruptcy proceedings.
Understanding Bankruptcy and its Impact on Real Estate
When an individual files for bankruptcy, their trustee is obligated to liquidate all non-exempt assets to repay the creditors. This includes all types of real estate, be it a personal residence or a cottage, regardless of whether it is solely owned by the bankrupt or jointly with a spouse, siblings, or other partners.
In Ontario, specific rules allow the bankrupt an exemption for principal residence, but only if the total equity in the property is less than $10,783. However, if your home doesn’t fall into this category, there are still options that can allow you to keep your home even if you file bankruptcy.
Establishing the Fair Market Value of the Cottage
The first action the trustee will take is to ascertain the fair market value of the property. They will request an independent appraisal, and then deduct any prior charges like mortgages and outstanding property taxes that would have to be paid if the cottage was sold. After these deductions, the remaining value or equity in the property will be determined.
If the bankrupt owns the property solely, then this equity belongs to the creditors in full. However, if a property is jointly owned, the amount due to the creditors would correspond to the bankrupt’s share in the property.
Realizing Equity in Bankruptcy
It’s a myth that properties are often sold by the trustee in bankruptcy cases. In reality, when it comes to a jointly-owned cottage, there are options:
Once the equity is determined, a negotiation typically ensues to sell the equity to the non-bankrupt owners or a third party. If the sale or amount becomes contentious, the trustee may seek court approval for the sale. No one aims to seize the family cottage; the objective is to obtain the equity to pay the creditors.
The Threat of Fraudulent Transfers
There are stringent rules that prevent an individual from selling or transferring a property for less than fair market value on the brink of filing for bankruptcy. These transactions, if detected, can be reversed by the courts. Therefore, selling or gifting your share of the cottage to your siblings to avoid having it realized in a bankruptcy is not advisable. The bankrupt is required to provide truthful answers about pre-bankruptcy sales of assets and could be charged with fraud if they provide false information on their bankruptcy forms.
The Option of a Consumer Proposal
If the bankrupt wishes to retain ownership of his share of the family cottage, they could consider filing a consumer proposal. This allows the debtor to maintain ownership over their assets while offering a settlement to their creditors. If the proposal is accepted, the debtor enters into a contract with his creditors to settle their debts.
As we’ve discussed, there are options to allow you and your family to retain ownership of a cottage or any shared asset even if one party needs to resort to bankruptcy to resolve other debt problems.
Impact of Bankruptcy on Joint Assets
Jointly-owned assets can complicate the bankruptcy process. While there are certain asset exemptions, jointly owned assets such as homes often do not qualify for these exemptions, depending on the equity in the asset. This means that if you are not the sole owner of your home or other valuable assets, the decision to file for bankruptcy should be made with careful consideration, taking into account the interests of all parties involved.
Matrimonial Home and Real Estate in Bankruptcy
Laws in each province, and the federal Bankruptcy and Insolvency Act, dictate which assets are exempt from seizure in bankruptcy.
In Ontario, if there is less than $10,000 of equity in your home – irrespective of whether it is jointly owned – you may keep it, and the equity is exempt, provided you continue making the mortgage and other home related payments.
However, if the equity in your home exceeds $10,000, the LIT (Licensed Insolvency Trustee) is required to recover your equity in it. This can be achieved by the LIT selling it with the other joint owner to a new owner, or the LIT selling your equity to you or your spouse.
Home Owned with Former Spouse in Bankruptcy
For recently separated couples who haven’t yet concluded a property settlement, the matrimonial home they lived in may not have been sold yet. During this time, one spouse typically continues to live in it, pending the formal distribution of the marital assets.
However, if one spouse files for bankruptcy before finalizing a property settlement, their interest in non-exempt jointly owned assets will vest in/be transferred to the LIT to be sold or realized upon for the creditors. This includes their share of the house they own with their former spouse, even if they no longer live in it.
If your ex-spouse is living in the jointly owned home, and the equity exceeds $10,000, your ex-spouse can collaborate with your LIT to reach an agreement to purchase your share of the equity in exchange for sole ownership of the home.
Family Vehicle in Bankruptcy
In most cases, you will likely be able to keep your vehicle during bankruptcy. In Ontario, your vehicle is exempt from seizure if there is less than $6,600 of equity (used vehicle value less the mortgage owed) in it. So, if your vehicle is worth less than $6,600, it is automatically exempt. If your car is worth more than $6,600, and you wish to keep it, the LIT will likely not seize it. Instead, an agreement will be made with you, or your spouse, to pay the equity that exceeds $6,600 to the LIT.
Savings Accounts in Bankruptcy
Accounts such as RRSPs, RESPs, and bank accounts often raise concerns for spouses when one partner is considering bankruptcy. Here is what you can expect if you have any of the following with your spouse:
- RRSPs. Registered savings like RRSPs and pensions cannot be held jointly and are protected from bankruptcy in Ontario. This means they cannot be seized except for RRSP contributions made in the 12 months preceding the bankruptcy.
- RESPs. In Ontario, Registered Education Savings Plans (RESP) are subject to seizure by the LIT. So, if you and your spouse jointly own a RESP, and you file for bankruptcy, either you or your spouse may want to reach an agreement with the LIT to buy-back your joint interest in the plan.
- Bank Accounts. While bank accounts are not considered an exempt asset, your full account balance will likely not be seized. It is common for the LIT to allow bankrupts to keep a reasonable amount of funds in their account to pay for living expenses such as rent, groceries, and other living costs.
Family Cottage in Bankruptcy
When it comes to a vacation property like a cottage that is jointly owned by multiple individuals, only the bankrupt’s share of the equity must be paid to the LIT, on behalf of the creditors.
Typically, what happens in this type of situation, is that once the bankrupt’s share of the equity is calculated, the non-bankrupt owners will have the opportunity to buy the equity from the LIT.
Consumer Proposal as an Alternative
If you are unable to pay your debts, but are concerned about how your spouse, or anyone else you co-own assets with could be affected, consider a consumer proposal, instead of bankruptcy.
A consumer proposal is a debt relief solution that allows you to come to a settlement agreement with your unsecured creditors to avoid bankruptcy. Under the terms of a consumer proposal, you will be permitted to pay back a reduced amount of principal debt you owe, interest-free, within a time frame, as agreed to by you and your unsecured creditors. Unlike bankruptcy, your assets will not be seized as a part of the consumer proposal process.
If you are seeking relief from your debts and you are unsure of your best course of action, speak with a Licensed Insolvency Trustee to learn more about your options.
