Exempt Assets in Bankruptcy: What Can I Keep?

When someone files for bankruptcy protection from the companies they owe money to, one of the things they express the most concern about are the personal items and assets they are allowed to keep.  Many of them fear all their assets will be seized by the Trustee and sold through an auction, leaving them with no possessions.

While it is true that, when someone files bankruptcy in Canada, all assets come under the control of the Licensed Insolvency Trustee (LIT), there is a system of exemptions in place to prevent the Trustee from taking your things.  The bottom line?  In most cases, most of your personal belongings and financial assets will be completely safe when filing for bankruptcy protection.

The Bankruptcy and Insolvency Act (the BIA) and provincial bankruptcy exemptions work together to ensure many of your assets are protected from seizure.  While the amounts differ slightly across some of the provinces, the provincial Executions Act determines which property is safe from seizure by the Trustee and the exact exemption amounts are updated over time. These rules are there to protect you and ensure your personal belongings, your vehicle, life insurance policies and other assets are safe.  

Let us take a quick look at some of these provincial exemptions.  For example, in Ontario your furniture and appliances have a maximum bankruptcy exemption of $14,180.  If you decided to file for bankruptcy protection, the Trustee would examine the liquidation value of your furniture and appliances and determine if they are valued below these amounts.  If they are, those assets are yours to keep.   For most of us, it is highly unlikely we have furniture and appliances valued above $14,000.

There is also an exemption in place for vehicles, an asset many Ontarians need to travel to and from work or even for a quick trip to the grocery store. Under bankruptcy protection every person is allowed one exempt vehicle, with a value of up to $7,117. Should the value of the vehicle be greater than this amount, the Insolvency Trustee can negotiate payment terms for the difference. For example, if you own a vehicle worth $9,000, you can keep this car by simply repaying the Trustee the difference, which in this example would be $1,883 ($9,000-7,117) once you file.

There’s even better news in the case of any leased or financed vehicle:  Most of the time these vehicles are exempt from seizure as they have already been pledged as security against the lease or loan amount outstanding.  That means they are safe from seizure if you remain current with the monthly payments to your lender or leasing company.

The last major category of exempt assets we should look at is investments and life insurance policies. Many people have pension plans, RRSPs, or life insurance.  When they file for bankruptcy protection these folks express concern they will lose those assets.  The good news?  Registered pension plans (such as those arranged through a union or an employer) are exempt under Provincial Legislation. Once the funds contributed are locked in, no one can touch them until the plan holder reaches the age of retirement, which is usually 65+. 

RRSP (Registered Retirement Savings Plan) contributions are treated slightly differently.  Some of us have RRSP contributions we make every year as a way of reducing the amount of tax we pay to the Canada Revenue Agency and as a method of saving for retirement.  Even these plans have partial protection available to them, as the money invested is exempt (apart from any money paid into the RRSP in the 12 months leading up to the filing of the bankruptcy). That one year’s worth of contributions would go to the bankruptcy estate.

For life insurance policies, there are several distinct types of insurance and, therefore, different rules apply to each type.  For example, a simple term life insurance policy is one with no cash value until the death of the policy holder and therefore it will not be seized by the Trustee.  

Alternatively, a whole life insurance policy or a universal life insurance policy could have a cash value (an amount that usually increases the longer the person holds on to the policy).  Under the Insurance Act, if such a life insurance policy does have a cashable value, then the policy would be cashed in at the time of filing and the proceeds turned over to the Trustee.  But any such plan where there is a preferred beneficiary listed (either a child, spouse, or parent of the plan holder) makes the whole life policy exempt from seizure by the Trustee.  Unfortunately, if you designate your dear Aunt Harriet as your insurance beneficiary there will be no exemption.  But, in such a situation, the Trustee can always negotiate a payment plan, allowing you to keep the policy intact.

The most important thing to remember:  There are exemptions available to you under the BIA and you will not automatically lose everything you own if you file a consumer proposal or a bankruptcy.  The BIA has built-in protection to shield many of your assets from the companies you owe money to.

Asset rules can be complicated to understand, and every situation is unique. To clarify how your assets might be handled during either a consumer proposal or a personal bankruptcy filing, please just click the FREE CONSULTATION button below or give us a call today. Our Trustees and Debt Solutions Managers can help you sort out all your asset issues.