What To Do If You’re Expecting to Receive an Inheritance or Other Windfall During Your Bankruptcy
Unexpected monetary gains are a rarity, often confined to the realm of dreams and fantasies. Be it hitting the lottery or discovering unknown wealth through an inheritance, these instances conjure images of sudden affluence. However, real-life scenarios often deviate from these fantastical notions. The influx of money outside regular income or investments often comes from known sources, although the exact timing may remain uncertain.
Consider the instance of receiving an inheritance from parents or a life insurance payout where you are the beneficiary. But what happens when such money comes your way while you’re undergoing bankruptcy proceedings?
A Closer Look at Bankruptcy
Bankruptcy, a legal status usually initiated by an individual unable to repay their debts, commences with the filing of a bankruptcy petition. In Canada, this period extends until the individual is discharged from bankruptcy. Fulfilling the responsibilities required by law, the passage of the necessary time period, and the trustee or relevant court granting the discharge marks the end of the bankruptcy period.
During this phase, the individual is termed an “undischarged bankrupt”. Until the discharge, their assets, barring a few exceptions, are vested property of their bankruptcy estate.
The Implications of Receiving Assets During Bankruptcy
If you’re in bankruptcy and suddenly come into a windfall, such as winning the lottery or inheriting wealth, these assets also become part of your bankruptcy estate. The nature of the asset, whether it’s financial (cash or investments) or a physical asset (like a house or vehicle), is irrelevant. The key factor is the event that led to the asset becoming due to you. Once an asset is due, it turns “receivable” and becomes part of the bankruptcy estate.
However, once you’re discharged from bankruptcy, these rules no longer apply. Assets you receive post-discharge are yours to keep, provided the event leading to the asset didn’t occur during your bankruptcy.
Hence, it’s crucial to comply with the requirements of your bankruptcy proceedings so you can receive your discharge as soon as possible. The longer you stay in bankruptcy without discharge, the higher the chances of receiving a windfall that you’d have to surrender to the bankruptcy estate.
What Happens to the Windfall During Bankruptcy?
As an undischarged bankrupt, you’re obligated to inform your Licensed Insolvency Trustee (LIT) if you’re due to receive a windfall. The LIT will arrange for the funds to be transferred to benefit your creditors.
Once in the estate, these funds are subjected to the regulations outlined in the Bankruptcy and Insolvency Act (BIA). The BIA dictates that the funds will be utilized to cover the cost of estate administration, specific regulatory fees, and provide distributions to the creditors owed money at the time of filing for bankruptcy.
If the funds in your estate cover all necessary fees and disbursements and provide 100% of the debt owed plus 5% interest for each year since filing bankruptcy, the remaining funds are paid back to you.
Income Earned During Bankruptcy
Income earned from employment, such as a raise or bonus, is treated differently from property. The “Surplus Income” provisions of the BIA dictate how much of your earnings must be paid into the bankruptcy estate. In general, you’d pay a maximum of 50% of the net amount to the bankruptcy estate from a raise or bonus. After these payments, the funds are handled similarly as outlined above.
Consumer Proposal Scenario
In a Consumer Proposal, assets, including windfalls, do not vest in the Trustee and remain with the individual who filed the proposal. Unlike bankruptcy, a Consumer Proposal is based on your income and assets at the time of filing and reasonable future expectations.
Once the creditors accept the proposal, it’s a binding agreement enforced by the BIA, and there’s no requirement to go beyond the agreed terms. Thus, unless your proposal mandates that windfall proceeds be paid into the proposal, any windfall ensuing from events during the proposal period remains with you.
Determining how windfalls and surplus income affect bankruptcy can be complex.
