What are exempt assets in a Bankruptcy? What can I keep when I file for Bankruptcy?
When someone files for Bankruptcy, one of the things they worry the most about is keeping their things. There are fears of all of their assets being sold through an auction or seized from them, leaving them with nothing.
While it is true that when someone files bankruptcy in Canada, all assets vest with a Licensed Insolvency Trustee. There is a system in place to help you keep certain assets under exemptions. The amounts differ from Province to Province, but the principal remains – if it is exempt, no one can take your things.
In Ontario, the Executions Act defines what constitutes exempt property and the amounts that are exempt.
For example, furniture has a bankruptcy exemption of $11,300, and personal effects $5,650. When someone files a Bankruptcy, the Insolvency Trustee looks at the liquidation value of their furniture and personal effects. If they are below these amounts, these assets are kept. Sometimes people have pledged these assets as security: once bankruptcy protection is in place, these assets are not to be seized by the creditor.
There is also an exemption for vehicles. During a Bankruptcy in Canada, every person is allowed one vehicle, with a value of up to $5,650. Should the value of the vehicle be greater, the Insolvency Trustee may be able to seize and sell the vehicle, or negotiate payment terms for the difference. For example, if someone has 2 cars and one is exempt and the other car is worth $9,000, when they claim bankruptcy, they can keep this car provided they repay the $3,350 ($9,000-5,650) back to the Trustee.
The last category of exempt assets is investments and life insurance policies. Many people have pension plans or RRSPs, and worry that they will lose these if they file for Bankruptcy. Pension plans are exempt under Provincial Legislation. Once the money is locked in, no one can touch it until a person reaches a certain age, usually 65. With respect to RRSP, they money invested is exempt, except for the contributions made in the last 12 months. This money comes to the Trustee.
For life insurance policies, there are a few different rules to know. First off, a term policy is a policy with no cash value for anyone, and would not be seized by the Insolvency Trustee. A term policy is usually effective and expires after a certain age. A whole or universal life policy has cash value as you pay, and this usually increases the longer you hold the policy.
Cash value of a policy is not exempt and the Trustee could seize these funds to divide between your creditors. Under the Insurance Act, if the policy has cash value and the beneficiary is in what is termed the designated class then this value is exempt. The class is defined by a direct relation to you. For example, a child, or spouse would be a designated beneficiary. An aunt or uncle would NOT be a designated beneficiary. If the policy is not exempt, the Insolvency Trustee can always negotiate a payment plan so that you can keep the life insurance policy – and peace of mind.
Asset rules can be complicated to understand, and every situation is different. It is best to consult a Licensed Insolvency Trustee to fully understand what happens to your assets in a bankruptcy. It is important to know that there is some protection under the bankruptcy laws in Canada for your assets, and that a person will not automatically lose everything if they file bankruptcy.
To learn more about all the assets that you can keep in the event of a Bankruptcy, schedule a free, no-obligation consultation with one of our licensed debt professionals.