Navigating Personal Bankruptcy & Your Assets
When an individual is faced with the financial hardship of filing for personal bankruptcy, one of the primary concerns is how their assets will be impacted. In this article, we will delve into the intricate process of the treatment of assets in a personal bankruptcy, offering an in-depth understanding of the implications, rules, and exemptions as per the federal and provincial laws.
An Overview
The path to personal bankruptcy generally begins with all the assets of the individual in question being transferred to the Licensed Insolvency Trustee (LIT). However, the treatment of these assets is subject to the provisions of the Bankruptcy and Insolvency Act (BIA) and provincial laws.
Personal Effects
Personal effects are items that are considered essential for day-to-day living. These typically include personal clothing and are largely exempt from seizure in a bankruptcy scenario. There are no specific monetary limits placed on these items.
Household Furnishings and Appliances
Household items such as furniture and appliances are also considered in the treatment of assets in a personal bankruptcy. However, there is an exemption limit of $14,180 for such items.
Retirement Savings: RRSP and RRIF
When it comes to retirement savings, the treatment varies based on the timing of the contributions. Contributions made more than 12 months before the date of bankruptcy are exempt. However, contributions made within the 12 months leading up to the bankruptcy are not exempt.
LIRA and Pensions
Funds held in a Locked-in Retirement Account (LIRA) or pensions that are governed by the Ontario Pension Benefits Act are exempt from seizure.
Joint Bank Accounts
The funds in a joint bank account may be considered an asset of the bankruptcy estate and subject to seizure. However, if the bankrupt can provide proof that the funds are jointly held and demonstrate their share of the funds, only their share will be considered an asset of the bankruptcy estate.
Tax-Free Savings Account (TFSA)
Unlike other savings, contributions made to a TFSA are not exempt and will vest with the LIT.
Registered Education Savings Plan (RESP)
Registered Education Savings Plans (RESPs) are typically owned by the plan holder, which is usually a parent. Since this type of investment can be cashed in at any time, it is not exempt and will vest with the LIT.
Publicly Traded Company Shares
Shares in a publicly traded company are not considered an exempt asset in a bankruptcy scenario and will vest with the LIT.
Timeshares
Timeshares, irrespective of their location, are not an exempt asset and will vest with the LIT.
Family Trusts
The bankrupt’s interest in a family trust is not exempt. However, the LIT must adhere to the terms of the family trust which may pose challenges in collecting on this asset.
Motor Vehicles
There is an exemption limit of up to $7,117 for one motor vehicle in Ontario. If the bankrupt owns multiple vehicles, they would need to arrange with the LIT to pay the fair market value of the additional vehicles to retain them.
Principal Residence
The principal residence of the bankrupt has an exemption limit of $10,783 in Ontario. If the bankrupt’s equity in the property exceeds the exemption, they must either arrange to repurchase the LIT’s interest in the property or surrender the property and receive the exemption in cash.
Life Insurance Policy
A life insurance policy with a designated beneficiary is an exempt asset. However, a life insurance policy payable to the estate of the bankrupt is not, and the cash surrender value of the policy is subject to seizure.
Personal Injury Claims
If the bankrupt is successful in litigating for damages for personal injury, the proceeds are considered an exempt asset.
Lottery Winnings
Lottery winnings by an undischarged bankrupt are an asset of the bankruptcy estate. However, if the winning occurs after the bankrupt’s discharge, the winnings are exempt from seizure.
Inheritance
Any inheritance received by an undischarged bankrupt is considered an asset of the bankruptcy estate. However, if the inheritance is received after the Bankruptcy has been discharged, it is not considered an asset of the Bankruptcy estate.
Tools of Trade
There is an exemption limit of up to $14,405 in Ontario for tools of trade and other personal property used to earn a living.
Income Tax Refunds
The LIT is required to file the personal income tax return for the year(s) prior to the Bankruptcy and for the year of bankruptcy. Any refunds available are an asset of the bankruptcy estate.
GST Credit
GST refunds are not an asset of the bankruptcy estate unless such refunds are required to cover the LIT’s prescribed fees and disbursements to a maximum threshold.
Canada Child Benefit (CCB)
The Canada Child Benefit (CCB) is an exempt asset. It cannot be assigned to the LIT, charged, attached, or given as security.
Disability Tax Credit (DTC)
Any pre and/or post-bankruptcy personal income tax refund resulting from a claim of the DTC is an asset of the bankruptcy estate.
Protecting Your Assets
For individuals with a significant number of realizable or high-value assets they wish to protect, it may be worthwhile to consider filing a Consumer Proposal instead. The LIT will review this option and help the debtor evaluate the pros and cons of each option given their individual circumstances.
