Safeguarding Home Equity in an Ontario Bankruptcy
This piece explores recent changes to Ontario’s Bankruptcy Exemption Law, specifically focusing on how they help protect individuals’ home equity. These changes, effective from December 16, 2020, have increased the protection levels for vehicles, furniture, and houses from seizure by creditors, even when individuals file for bankruptcy.
Introduction
The law in question is the Execution Act, which outlines the value of exemptions for items such as clothing, furniture, trade tools, and vehicles. In layman’s terms, it defines the assets individuals can retain when declaring bankruptcy in Ontario.
Ontario’s Updated Law: A Closer Look
Section 2(2) of this updated Execution Act, effective from December 1, 2015, states that a debtor’s principal residence is immune from seizure if the debtor’s equity doesn’t exceed $10,783. However, if the equity surpasses this amount, Section 2(3) declares that the principal residence is open to seizure.
Implications for Insolvency Filers
Before these changes, if you had house equity, it was mandatory for your bankruptcy trustee to “realize” that equity. In simple terms, “equity” is the funds left after a house is sold, and all associated costs, including the mortgage and other selling expenses, are paid.
After these changes, a trustee cannot seize your principal residence if the equity is $10,783 or less. However, if the equity is higher than $10,783, the trustee must realize on the equity, making a consumer proposal often the preferred option for those wishing to keep their houses.
Consumer Proposal and Home Equity
When individuals file a consumer proposal, the offer they need to make to their creditors is partly based on their home equity. This new $10,783 protection will reduce the equity available to creditors by up to $10,783, potentially resulting in lower proposal payments. Notably, this exemption is only for a principal residence, not investment property or a second property like a cottage or vacation home.
Updated Exemption Limits
Alongside a home equity limit addition, existing bankruptcy exemption limits in Ontario have been increased. The revised limits under the Execution Act are as follows:
| PRE DECEMBER 1, 2015 | AS OF DECEMBER 1, 2015 |
|---|---|
| Necessary and ordinary apparel – $5,650 | Necessary clothing – no limit |
| Household furniture, utensils, equipment, food and fuel – $11,300 | Household furnishings and appliances – $14,180 |
| Motor vehicle – $5,650 | One motor vehicle – $7,117 |
| Tools of the trade $11,300 (farmers $28,300) | Tools of the trade $14,405 (farmers $31,379) |
| Personal property prescribed by the regulations – no amount prescribed, therefore $0 | Principal residence – no amount prescribed, therefore $0 |
| Principal residence – $10,783 seizure restriction, not an exemption |
Additionally, most life insurance products and funds held in an RRSP for more than 12 months are also protected under the law.
Changes Regarding Jewelry and Non-clothing Possessions
The language of most exemptions is also changing. The Execution Act now states that there will be no exemption limit for necessary clothing. However, the wording has been changed to exempt ‘necessary clothing’ rather than ‘necessary and ordinary apparel’. The alteration in the wording may limit a bankrupt’s ability to exempt personal items from seizure.
Does a Consumer Proposal Make Sense with Home Equity?
Before the new legislation, consumers with significant unsecured debt could safeguard their home equity by filing a consumer proposal and offering the equivalent ‘value’ to their creditors as part of their settlement terms. However, even with the new home equity exemption, consumer proposals will still be a preferable solution for many individuals, especially those with surplus income payments in a bankruptcy.
Conclusion
The changes in the Ontario Bankruptcy Exemption Law aim to provide a financial cushion to individuals filing for bankruptcy, particularly for protecting their home equity. While these changes make the process less punitive, the implications of declaring bankruptcy are still significant. Therefore, individuals should carefully consider their financial situation and seek advice from financial experts or Licensed Insolvency Trustees before making any decisions.
Contact Information
For more advice on Ontario Bankruptcy Exemption Law and its implications on your home equity, feel free to contact us.
