What Assets Can I Keep in a Personal Bankruptcy?

One of the most common concerns of  someone contemplating personal bankruptcy is whether they will lose their car, their house or other items they may need or have worked hard to obtain.

It may be comforting to know that the Bankruptcy and Insolvency Act permits someone who files for bankruptcy to keep assets that would be exempt from seizure under provincial laws.   If an asset is exempt, it can’t be seized to pay your creditors.  The purpose of these exemptions is to allow you to maintain a reasonable, but frugal, standard of living so you can move forward while you are in bankruptcy.  The exemptions vary from province to province.  

In Ontario, the most common items you will be able to keep are as follows*:

• Household Furniture & Equipment not exceeding a combined value of $11,300
• Personal possessions (clothing, jewellery, etc.)  not exceeding a combined value of $5650
• A motor vehicle, or equity in a motor vehicle,  not exceeding $5650
• Tools of your trade not exceeding a combined value of 11,300
• Cash Surrender value of Life Insurance policies wherein the designated beneficiary is a spouse, child, grandchild or parent.
• Most Pension Plans
• Most Locked-In RRSP’s associated with a life insurance company wherein the designated beneficiary falls within a certain class

In addition to the exemptions allowed by the province of Ontario, the Bankruptcy and Insolvency Act allows you to keep*:

• RRSP’s held with an institution that is not an insurance company with the exception of any contributions made within the last year.  This exemption applies to all provinces only if you are bankrupt.

Although the exemptions are generous, often you may have an asset that does not fall within the exemptions or is worth more than the exemption limits.  In this situation, you will either lose or have to pay for that asset.   Let me give a few examples:

Scenario One - Will I lose my Car if I go Bankrupt?

Three years ago Mr. Smith obtained a loan from the bank to buy a car.  For protection against default, the bank put a lien on the car.   Today, the vehicle is worth $8000 but Mr. Smith still owes $12,000 to the bank.  Since the car is worth less than what is owing, Mr. Smith should be able to keep his car as long as he continues to make the monthly payment to the bank. 

Scenario Two:

Mr. Smith owns a vehicle outright.  It’s worth $8000 but the exemption that is allowed for a motor vehicle in Ontario is only $5650.  The value of his car exceeds the exemption by $2350 (i.e. $8000 - $5650).   In order to keep the vehicle, Mr. Smith will have to pay the $2350 into his bankruptcy, usually by making a monthly payment over the duration of the process of bankruptcy. 

Scenario Three:

Mrs. Smith owns a boat worth $2000.  There are no liens on the boat.  Since a boat does not fall into any category of exemptions, if Mrs. Smith wishes to keep it, she will have to pay the $2000 that it’s worth into her bankruptcy.  If she can’t afford to make the payment or if she has no desire to keep the boat, the trustee will sell it to someone else.

Scenario Four - Will I lose my House if I go Bankrupt?

Mr. Jones has a house worth $250,000 but there is still $260,000 owing on the mortgage(the real estate market in his area has recently declined).  Since his house is worth less than what is owing, Mr. Jones can keep his house as long as he continues to pay the mortgage company.

Scenario Five:

Mr. Jones has a house worth $250,000 but there is still $240,000 owing on the mortgage.  On paper, his house is worth $10,000 more than what is owing.  If Mr. Jones wants to keep his house, he will have to continue to make the mortgage payment to the mortgage company and also pay the equity ($10,000) into his bankruptcy.  The trustee will likely allow for some negotiation on the amount to be paid since if the house was actually sold there would be some selling costs.

The provincial exemptions in Ontario and the examples above clearly debunk the myth that you will “lose everything” if you find yourself facing a bankruptcy.  Please keep in mind; however, that it’s always best to speak to a licensed Trustee in Bankruptcy to get answers about your specific situation.

By:  Brenda D.  Owens, Trustee in Bankruptcy

Brenda works for James R. Yanch, Trustee in Bankruptcy

215 Simcoe St. N.

Oshawa, Ontario

L1G 4T1

905-721-7506

www.jamesryanch.com

*Please note this is a simplified list of exemptions and is not inclusive.