Debunking Bankruptcy Myths: Understanding What Property You Can Retain
While bankruptcy can be a daunting prospect, it’s essential to understand the realities of the process, particularly regarding “What property can I keep after I declare bankruptcy?”. People often harbor a fear that filing for bankruptcy equates to losing everything they own. However, this is a common misconception.
The Fear: Declaring bankruptcy means giving up all my belongings, including my home, car, and personal savings.
The Reality: The regulations surrounding what you can retain during bankruptcy differ across regions. However, each government has established certain parameters, known as ‘personal bankruptcy exemptions,’ that outline what assets are protected in such circumstances. These exemptions generally cover basic necessities, within specific monetary limits, and may include:
- Household items, such as food and furniture.
- Personal items like clothing.
- Your vehicle.
- Tools needed for your work.
- Pensions and retirement savings.
Understanding Personal Bankruptcy Exemptions
Household Items
In most regions, you are entitled to retain a reasonable amount of household furniture and appliances after declaring bankruptcy. The value of these items is based on their current market value, rather than the price you initially paid. You won’t typically need to have these items appraised; instead, you will sign a document declaring your estimation of their combined worth.
Personal Items
This category encompasses personal clothing and, in some cases, small personal items such as jewelry. Again, the value is determined by their current market value. Most clothing items have minimal worth, while jewelry often holds more sentimental than financial value. If you have high-cost jewelry, you can get it appraised for cash value, significantly lower than insurance or retail price value.
Retaining Your Vehicle in Bankruptcy
The question of whether you can keep your car during bankruptcy is a common concern. If you own your vehicle outright, you can retain it, provided its value does not exceed the provincial bankruptcy exemption limit. If its value exceeds this limit, you can still keep it by paying the trustee the difference.
For instance, in Ontario, if your vehicle is worth $7,517, you would need to pay the trustee an additional $400 in the bankruptcy to retain your car since the exemption limit for a vehicle in Ontario is $7,117. If you are uncertain about your vehicle’s value, you can get it appraised or consult us to look up its Canadian Black Book value.
Retaining Your Home in Bankruptcy
Contrary to popular belief, declaring bankruptcy does not automatically mean losing your home. In most cases, homeowners surrender their homes in bankruptcy to escape an unfavorable mortgage or negative equity situation, not because the trustee seized it.
However, the rules can be complex. Some provinces have an exemption for a certain amount of equity in your home, while others do not. Even if your home’s equity exceeds the exemption limit, you might still be able to retain it during bankruptcy.
This is because the principle of bankruptcy is that you are granting the trustee control over your assets in exchange for eliminating your debts. However, the trustee will only consider selling a home if they believe it can yield a profit after paying all closing costs, including outstanding property taxes, realtor’s commissions, legal fees, and penalties for breaking a mortgage.
Work Tools
Most provinces recognize that you will need to earn a living after declaring bankruptcy. Hence, if you use specific tools, equipment, or machinery to generate income, you can retain these items, provided they are worth less than the provincial limit.
Pensions, Life insurance, and RRSPs
Canadian provincial laws robustly protect pensions. For instance, the Pensions Act of Ontario stipulates that a pension is not subject to execution or seizure. Therefore, a trustee in bankruptcy cannot seize the fund and distribute it to your creditors.
Recent rules now permit you to retain your RRSP investments, excluding contributions made into the RRSP in the 12 months leading up to the bankruptcy.
In most cases, life insurance and pensions are also exempt from seizure during bankruptcy. However, it’s advisable to provide a copy of your policy during your initial consultation, so we can review the documents and confirm whether yours is at risk.
Health Aids
While most provinces have exemptions for health and medical aids, it’s best to discuss your situation with the trustee.
Assets You Cannot Retain
Savings Bonds, TFSAs, and RESPs can be seized during bankruptcy as they are essentially cashable savings accounts. However, those contemplating bankruptcy usually exhaust their savings accounts long before filing for bankruptcy to avoid it. If you still have savings, a consumer proposal might be a better option for you than bankruptcy, as it may enable you to retain some or all of your savings.
Those concerned about losing an asset during bankruptcy often opt to file a consumer proposal instead. In a consumer proposal, you retain control over all your assets regardless of their value.
The exemptions and rules surrounding what you can retain or lose during bankruptcy in Canada can be quite complex. Therefore, it’s advisable to consult a Bankruptcy Canada Trustee over the phone or in person. Our trustees offer convenient hours, and the initial consultation is free with no obligation to you. Contact a bankruptcy trustee in your area if you have questions.
