Personal bankruptcy can be a daunting process filled with uncertainties. One of the major concerns for individuals considering bankruptcy is the fear of losing their assets. However, certain exemptions exist in law that allow individuals to retain some of their assets during bankruptcy. Understanding these exemptions is fundamental to navigating the bankruptcy process effectively.
Understanding Bankruptcy Exemptions
In simple terms, exemptions in bankruptcy refer to the assets or properties that you are legally allowed to keep during and after bankruptcy. These assets are exempted from seizure and are not part of the bankruptcy estate, which is the pool of assets that are liquidated to repay creditors.
The purpose of these exemptions is to ensure that individuals are not left completely destitute after bankruptcy and have the basic necessities to start fresh. The specifics of what is exempt can vary widely depending on your location, as bankruptcy is governed by both federal and provincial laws.
Types of Bankruptcy Exemptions
There are generally two types of exemptions in bankruptcy: federal and provincial. Federal exemptions apply across the country, while provincial ones vary depending on the province you live in. Here are some of the most common exemptions:
Ontario Bankruptcy Exemptions
In Ontario, the law allows you to keep certain essential assets up to specific amounts. These include:
- All clothing.
- One motor vehicle valued up to $7,117.
- Household furniture, equipment, and food up to $14,180.
- Tools or equipment used for work up to $14,405.
- Most pensions and life insurance policies.
- Equity in your home up to $10,783 (if your equity surpasses this limit, there is no exemption).
Federal Bankruptcy Exemptions
On a federal level, the Bankruptcy and Insolvency Act also provides for certain exemptions:
- GST/HST credits.
- Property held in trust for another person.
- Registered Disability Savings Plan (RDSP) savings.
- RRSP and RRIF savings.
It’s crucial to remember that these exemptions are subject to change and may vary depending on your specific circumstances, so it’s always best to consult with a bankruptcy professional to understand what applies to you.
Non-Exempt Assets: What You May Lose
Assets that are not covered by the exemption are known as non-exempt assets. These are the assets that you are likely to lose in a bankruptcy case. They are typically sold off to repay your creditors. Common non-exempt assets can include:
- Excess equity above the exemption in the first vehicle plus any additional vehicles.
- Investments not protected in a registered account (such as TFSA accounts).
- Cash in your bank account above a reasonable amount required for short-term living expenses.
- Luxury items like jewelry, coin collections, and valuable art.
- Inheritances received before or during bankruptcy.
- Second homes or vacation properties.
- Tax refunds on income earned leading up to the filing date.
Understanding Equity
Equity refers to the value of an asset after any secured debts (like mortgages or car loans) are deducted. For example, if your home is worth $700,000 and you have a mortgage of $650,000 on it, your equity in the home is $50,000. This concept is important when considering bankruptcy exemptions as it can determine whether an asset is exempt or non-exempt.
Can You Keep Your Home in Bankruptcy?
Whether you can keep your home when filing for bankruptcy primarily depends on the amount of equity you have in it. If the equity is within the exempt limit, you may be able to keep your home. However, if your equity exceeds the exempt limit, your home may be sold off to repay your creditors.
If you’re worried about losing your home, there are alternative solutions to bankruptcy that you might want to consider, such as a consumer proposal.
What Happens to Your Car in Bankruptcy?
Whether you can keep your car during bankruptcy depends on several factors, such as the value of your car, the balance on your auto loan, and why you’re unable to pay your debts. If the equity in your car doesn’t exceed the exemption limit, you may be able to keep it. However, if the equity in your car is higher than the exemption limit, your car may be sold off to repay your creditors.
Consumer Proposals: An Alternative to Bankruptcy
If you have significant non-exempt assets that you want to keep, a consumer proposal may be a better option for you. A consumer proposal is a legal agreement between you and your creditors that allows you to repay a portion of your debts over a set period, usually up to five years.
Seeking Professional Help
Navigating the bankruptcy process can be complex, making it crucial to seek professional advice. Licensed Insolvency Trustees can provide you with the guidance and support needed to understand your options and make an informed decision.
Conclusion
Understanding bankruptcy exemptions can be critical when dealing with financial distress. By knowing what assets you can keep and what you may lose, you can make a well-informed decision about whether to file for bankruptcy or explore other alternatives. Always consult with a bankruptcy professional to ensure you’re making the best decision for your financial future.
