Joint Property in Bankruptcy

Joint Assets & Property in Bankruptcy: A Comprehensive Guide

Bankruptcy can be a complicated and challenging journey, especially when it involves joint property. Understanding how Joint Property in Bankruptcy works is crucial for couples, ex-spouses or any joint property owners. This article provides an extensive guide to the subject, detailing numerous scenarios and how bankruptcy could potentially affect them.

About Bankruptcy

Bankruptcy is a legal avenue designed primarily for individuals grappling with insurmountable debt. It provides a structured approach to eliminate unsecured debt for insolvent individuals, i.e., those whose assets are insufficient to cover their debt or who cannot make the agreed-upon payments to creditors.

A Licensed Insolvency Trustee (LIT) is assigned to manage the process, including the seizure and sale of non-exempt assets. The proceedings from the sale are then utilized to repay the creditors.

Impact on Joint Assets

The bankruptcy process can get complex when it involves assets that are jointly owned.

Matrimonial Home and Real Estate

The bankruptcy laws vary across provinces in Canada. But in general, if the principal residence’s debtor’s equity does not exceed $10,000, it is exempt from seizure in a bankruptcy. However, if the equity exceeds this limit, the asset is subject to seizure.

For a jointly owned home, the equity is typically divided between the owners. For instance, if a couple owns a home with an equity of $50,000, each partner owns an equity of $25,000. In a bankruptcy scenario, the bankrupt partner’s equity will be considered for seizure.

In cases where the equity in the home is substantial, the partners can negotiate with the trustee. They can either repay the bankrupt partner’s share of the equity or buy it from the trustee at the market value.

Home Owned with Ex-Spouse

In cases of separation or divorce, the matrimonial home may still be jointly owned until the formal distribution of marital assets. If one partner declares bankruptcy before the completion of the divorce or separation agreement, their share of the house is subject to seizure.

The non-bankrupt ex-spouse can negotiate with the trustee to buy out the equity. Alternatively, the trustee may register a lien on the property equal to the bankrupt partner’s share of the equity. The lien will be paid once the house is sold, post the repayment of the mortgage.

Family Vehicle

For a jointly owned vehicle with no outstanding finance, the value of the vehicle is equally distributed between the owners. As per Ontario laws, a bankrupt is allowed an exemption for one motor vehicle up to $6,600. So, if the 50% share of the vehicle’s value is below this amount, the vehicle will not be seized by the trustee.

In cases where the vehicle’s value exceeds the exemption limit, the vehicle’s owners can “buy out” the difference from the trustee.

If the vehicle is financed or leased, it will be considered a secured asset and will not be included in the bankruptcy, as long as the payments are made on time.

Savings Accounts

Spousal RRSPs

Registered savings like RRSPs and pensions cannot be held jointly, and they are exempt from seizure in a bankruptcy, except for contributions made in the last 12 months. In the case of a Spousal RRSP, if the annuitant (registered account owner, beneficiary or annuitant) files bankruptcy, any contributions made in the last 12 months will be seized by the trustee.

RESPs owned jointly

Registered Education Savings Plans (RESP) can be held jointly. In Ontario, RESPs are subject to seizure in a bankruptcy. The bankrupt or their spouse can “buy back” their seized half from the Trustee either as a lump sum or as part of the bankrupt’s bankruptcy payments.

Bank and savings accounts

Joint savings accounts, GICs or other unregistered plans are not protected in a bankruptcy and the trustee will look to realize on the bankrupt’s 50/50 share in these assets.

Consumer Proposal: An Alternative to Bankruptcy

A consumer proposal is a potential alternative to bankruptcy. It allows the debtor to make a deal with creditors to repay a portion of the debt over a period of up to 5 years, while keeping their interest in the joint property intact.

This option is particularly useful for individuals who have significant equity in their joint properties and savings but are unable to refinance their unsecured debts.

It’s always advisable to consult a Licensed Insolvency Trustee to understand the best debt relief options and the implications of bankruptcy on joint property.

Conclusion

The process of bankruptcy can be complex, especially when joint assets are involved. Understanding how Joint Property in Bankruptcy works can help individuals make informed decisions. Always consult with an expert to understand the best course of action for your unique situation.

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