What Happens to Joint Property in Bankruptcy?
Joint Property in Canadian Bankruptcies
Financial troubles are always difficult and stressful to deal with, especially if joint property is involved in the bankruptcy.
It impacts not just the debtor but their family as well.
Some people consider bankruptcy as an option.
This is a legal process under the federal law of Bankruptcy and Insolvency Act, and modified by Provincial exemptions.
Each person’s reason for filing for bankruptcy is personal and different.
The most common reasons for filing bankruptcy include the following:
- Severe loss of income and an inability to repay the debt. This could be from a downturn in the economy, the failure of a business that you own or work for, illness or other issues;
- The interest rates you are paying leaves nothing available for living expenses. Your lenders are not amenable to a reduction of interest rates to allow you to regroup;
- Your credit is at its limit and you can find no other resources;
- A divorce or legal separation has left you with a single income but a mountain of debt particularly credit cards;
- All of these factors combine to affect your personal health and ability to function and is having its toll on your family;
- You are or have lost the ability to maintain personal relationships or a turn to alcohol or other substance abuse.
In a bankruptcy proceeding, joint property is of particular concern.
Joint property includes a house and its equity, vehicles, unregistered savings accounts (GIC), and registered savings (RESP).
Here again, the trustee in bankruptcy will be responsible to separate assets belonging to the couple from the one exclusively owned by your spouse.
Should the trustee in bankruptcy seize some of your spouse’s property, it will be possible for him or her to oppose such a measure.
There are situations where the Trustee considers the asset to be the property of the person filing bankruptcy, but it is actually owned by the spouse.
If that happens, the spouse needs to work directly with the Trustee to resolve the matter.
While this occurs predominantly with savings accounts, it can happen with other property.
Remember that specifics may vary from one Province to another, but below are some general aspects of joint property ownership and how it is affected by a declaration of bankruptcy.
The principal residence is exempt as long as the equity is no more than $10,000.
If the equity is greater than $10,000 then it can be seized.
If you are thinking in terms of a bankruptcy filing, have your property assessed for its equity value.
In the case of a marital home, the spouse filing bankruptcy can allocate their share of the house to the Trustee and the non-filing spouse can buy back that equity from the Trustee at a fair market value.
The Trustee can also petition the Court to force a sale at a court-approved price.
Another option is to file a consumer proposal where the debtor can keep the house but strike an arrangement to repay at least a portion of the debt over a five-year period.
If a divorce or legal separation is in the works but the couple still own the house together, it can affect both parties through a property seizure.
Again, the ex can work with the Trustee to buy out the other half.
If the couple is planning to sell the house as part of the divorce, the Trustee will probably file paperwork to allow the mortgage to be paid but then the Trustee gets first chance at the rest of the sale proceeds, ahead of the ex-spouse.
In any event the parties should discuss the options with the divorce attorney for the best solution in the individual circumstances.
If both names are on the vehicle ownership paperwork, then both parties own the vehicle equally.
A bankruptcy exemption allows one vehicle to a value of $6,600.
If the share of the vehicle is less than that amount, the car, truck, etc. would not be seized during the bankruptcy proceedings.
If the vehicle’s total value is $13,200 or more, the spouse has the option to buy out their portion.
When there is an outstanding loan on the vehicle, it is still exempt until the loan is paid off or payments are not paid.
Then the vehicle will be repossessed by the lender.
RRSPs, company, and governmental pensions can be owned by only one person, not jointly.
These assets are exempted from seizure except for any contributions made in the 12 months prior to the bankruptcy filing.
A Spousal RRSP is when the spouse is the owner, beneficiary or the specified annuitant.
If that spouse is the person filing bankruptcy, then the amount of any contributions to that Spousal RRSP in the previous year will be seized.
It becomes complicated if the non-annuitant spouse has made contributions during the current or two previous years.
An RESP is a savings plan that can be owned jointly.
In case of a bankruptcy, it is seizable property.
The non-bankrupt party can buy back their share from the Trustee much like home equity or a vehicle.
Joint checking accounts are not exempt but most Trustees will not seize them as long as the balance is estimated to cover the cost of rent, groceries, or other living costs.
Joint savings accounts, GICs or other plans will be taken on a 50/50 basis with the spouse retaining the balance.
Instead of a bankruptcy, some people will opt for a consumer proposal to help handle the debt situation.
A consumer proposal lets the debtor make reasonable arrangements for repayment, usually at a lesser but reasonable amount.
Dealing with representatives of collection agencies can be difficult.
Sometimes they try to collect the debt by saying that the spouse becomes responsible for repayment.
Unless it is a joint debt, this is not true.
Instead of feeling responsible and intimidated, the spouse should simply request written documentation of his or her responsibility.
As you can tell, the regulations surrounding bankruptcy can be rather complex.
Filing for bankruptcy is a serious matter and anyone contemplating the action should get all the information possible before proceeding.
It is important to rely on the knowledge and experience of the Trustee.
You should seek out the services of a Licensed Insolvency Trustee.
This is a person or company that will be happy to help explore your options, including filing for bankruptcy.
As mentioned, above, there are some exclusion and options, most of which vary by Province.
Some of these exemptions are difficult to interpret and your Trustee should be able to explain how they work.
If you don’t understand, ask that it be explained differently.
Bankruptcy is a serious step and anyone considering it should explore the consequences for themselves as well as their spouse.
Bankruptcy also impacts anyone with whom the bankrupt are co-owners in assets or other property.