One of the more confusing aspects of bankruptcy law in Canada is that when you file for bankruptcy you sign over your interest in the things that you own on the day you file plus anything you may come to own before your bankruptcy is completed. The law doesn’t apply to things you hold in trust, or for things that are exempt from seizure under provincial law – but it does apply to everything else.
That means if a bankrupt wins a lottery, inherits money or something of value, even if they receive a gift during their bankruptcy, the money or other item may be seized by their bankrupt estate for the benefit of their unsecured creditors.
Technically this is called after-acquired property and while it is not common, it does happen often enough that we warn everyone we speak to how this section of bankruptcy law works.
After-acquired Property Vs Earned Income
After-acquired property should not be confused with earned income. If you receive a bonus or some other form of work related windfall it should not be seized. Earned income is subject to something called the surplus Income rules and may result in penalty payments representing a portion of the money, as opposed to the loss of the entire amount for after-acquired property.
Confused? It is probably all the technical terms. Let’s try this. If you receive a lump sum of money or some item during your bankruptcy trace the money or item back to its source. Did you receive it as a result of your work? Did you receive it as a result of some retro-active government benefit? If you answered yes to either of these questions the money or item is likely subject to the surplus income rules and not seizure as after-acquired property.
If on the other hand the item or money was a gift, or the result of a will, or perhaps a random chance (lottery winnings) then in all likelihood it is not earned income and the after-acquired asset rules will apply.
Protecting A Windfall
Section 176(1) of the Bankruptcy & Insolvency Act states that anyone who is bankrupt is required to advise the trustee if they have received any after-acquired property and income. Failing to disclose this information can jeopardize your bankruptcy discharge.
Interestingly, neither the after-acquired property rules, nor the surplus income rules apply when you file a consumer proposal. If it is likely that you may receive a windfall of some sorts in the next year then it may make more financial sense to file a proposal instead of bankruptcy. At the very least you should consider it.
Conversely, if you have already filed for bankruptcy and you become aware of a windfall you may want to ask the trustee handling your file whether or not it makes sense to file a consumer proposal, funded by the windfall. If accepted the consumer proposal causes the bankruptcy to be cancelled. This may sound complicated, but we have done this very thing dozens of times for people with a high rate of success.
Always talk to your trustee about any possible windfall or extra income you may be expecting during your bankruptcy. Discussion the possibility before hand means you may avoid any unpleasant surprises while bankrupt.
RE: UK inheritance during bankruptcy period…rules regarding after-acquired property and international law?
I wondered if you had come across this situation before? It appears that after-acquired property first vests in the bankrupt. For a UK inheritance, I presume the proceeds would be paid to the bankrupt individual who would then forward the appropriate amount to the Canadian trustee? Can the trustee compel the probate attorney to pay him/her directly?
In simple terms, all inheritances vest in the trustee, regardless of which country they come from. Typically the Canadian trustee would inform the estate lawyer of the bankruptcy, and the lawyer would forward the funds to the trustee. In the event that the bankrupt received the funds directly, they would be required to turn them over to the trustee.
As a side note, that is one of the reasons why, if a debtor expects they may be entitled to an inheritance before their bankruptcy discharge, they would consider a consumer proposal as an alternative.
I declared bankruptcy 5 months ago. I have reported to and paid my trustee each month.
I did not expect this situation, However, as a result of a separation and consequent divorce., I will get an unexpected lump sum of money from my ex husband because of the matrimonial home.
I now know this is called after acquired property. I still have 4 months of my bankruptcy to serve. It is enough money to completely pay out my creditors with money left over. I am willing to do this. What will happen now to this money? Can I switch at this point from the bankruptcy declaration to a creditor proposal. My trustee NEVER discussed or disclosed other options to me at the time of my consultation for filing. He is dishonest and a bully and he has treated me very badly and unfairly in my estimation. He is not a nice person. I have had great issues in dealing with him.
After paying my creditors can he just take my money which he in no way earned. It is my opinion he has in no way earned the trustee fee I pay him monthly. He hides his office in an old run down house where the receptionist is hand writing receipts (all to pretend show they are not making a lot of money and they do “austerity”) while in the meantime he lives in a million dollar plus home that he hides by being very low key in the community. It is all “smoke and mirrors” where he is concerned.
Hi Judy. If the creditors are completely paid out, and all other costs are paid, any extra money would be returned to you. Yes, you could also file a consumer while bankrupt, so if you are not satisfied with your bankruptcy trustee that would be an option; you could select a different trustee to file your consumer proposal.
What if the spouse who did not declare bankruptcy gets a windfall before the bankrupt spouse has been discharged?
If a non-bankruptcy spouse gets a windfall, it’s the non-bankrupt spouse’s windfall, and should not impact the bankrupt spouse.
I filed for personal bankruptcy 3 years ago and I am not discharged yet. I owed approx $500,000 due to failed business and forced retirement due to illness. After notifiying all creditors, two of major ones sued my wife which left about $45,000 oweing in total.
I received a life insurance payout which is enough to pay rest of debt without going bankrupt. I suggested a proposal and trustee didn’t agree.
What do you suggest, is it too late.
It is still possible to file a proposal while you are an undischarged bankrupt. You could discuss this with your trustee again, or go to another licensed insolvency trustee for a second opinion.
What happens if before you file you recieved a life insurance benefit when your partner died?
Hi Rob. If you have cash on hand from a life insurance policy when you file, your trustee will take that into consideration, because cash is an asset of the estate. If you have some cash, but not enough to repay all of your debts, it may be better to consider filing a consumer proposal.
My husband is in a bankruptcy & I opted to do a consumer proposal. During his bankruptcy my father died & is leaving me an inheritance. Will part of this be paid into my husbands’ surplus income for his monthly reporting or is it protected because I chose to do a proposal?
Your assets should not impact your husband’s bankruptcy. An inheritance is an asset, not income. This has nothing to do with the fact that you filed a proposal. Your assets are your assets regardless. However, if you are concerned about this, your trustee can provide you with a more complete answer.
I am currently in bankruptcy and wont be discharged until March 2019 I am looking to file for a divorce and will probably get a decent sized settlement if this happens before I’m discharged what will happen or am I better off waiting. Thank u Diahann
You need to speak to your trustee and your lawyer. There may be many different answers depending on the specific facts of your case – sorry, but there isn’t a quick “internet answer” for your question.
I have an immediate family member that sadly had to file for his 2nd bankruptcy in NFLD and is currently making the required monthly payments. His car is on its last legs and I am considering purchasing a used one for him to be able to get around. My question is can this be done while he is going through the bankruptcy process and if so is there a limit on the purchase price. He would of course put it in his name etc but I would make the purchase. Thanks for any info, I am thinking that in the end it would be advisable for him to talk to the agency he is dealing with directly and explain the situtation to them.
Hi Brad, you are correct, he should talk to his trustee before putting any assets into his name. If it’s an inexpensive car it probably won’t be an issue, but to be safe he should discuss it with his trustee first so that there are no surprises.
It is always a good idea for someone to speak directly with the trustee that they are dealing with – that should be the best source for accurate answers.
Having said that, if you want to purchase a vehicle for the bankruptcy there are no limits per se, but if you simply “give” it to the bankruptcy it may be treated as a windfall and therefore subject to seizure and sale as after acquired property. Now if you “sell” it to the bankrupt for its fair price with a bona fide plan of repayment, including a properly registered lien on the car, then no one can call it a windfall. Make sense?
If your credits are owed 50,000.00 plus interest and your windfall is 5 million dollars are you required to turn over 5 million and wait until the creditors are paid before getting the balance back> If so, how much is the trustee allowed to keep and how long do they have before giving you back the surplus?
Lottery winnings are called a “windfall” and are subject to seizure by your bankrupt estate. If you won $5 million dollars and only owe $50,000 then I suggest you hire a lawyer to hold the winnings in trust, repay your debts in full and then apply to the Court to have the bankruptcy annulled.
Or you can let your trustee seize the winnings, pay off your debts in full, apply to the Court to have your bankruptcy annulled and then return the excess winnings to you. Since either of these processes require an application to Court it is difficult to predict how long they may take. Talk to your trustee and they’ll find a reasonable accommodation (ie I bet they’ll release some funds to you right away). There is no advantage to the trustee to hold on to the winnings. Unlike lawyers, trustee do not keep any interest earned on money held in trust.
Hello” Thank you for your response to my question concerning a “windfall”. The other part of my question was what portion of a “windfall” or percentage is the trustee allowed to keep as their fee.
Hi Geri. If you have a windfall while bankrupt, the trustee takes the money and uses it to pay your debts. If it’s a large windfall and there is more than enough to pay off your debts in full, plus costs, then the remaining funds are returned to you.
I filed for bankruptcy and about 3 months later my father left me a considerable inheritance. My trustee contacted the estate lawyer and got a copy of the will and assets. The trustee says they have no interest in the will. The estate lawyer said If i get the order of absolute discharge before the estate settles, all the money will be mine to keep. Is this correct?
No. Any monetary inheritance you may be entitled to vested (was transferred) to your bankrupt estate when your father died. It doesn’t matter when your father’s estate settles, the critical date was when your father died and the fact that you were an undischarged bankrupt at that time. Sorry.
If you take a cash payout, from your work pension plan, while still in bankruptcy will it be forfeited to trustee. Texting from NS.
Quite possibly – at the very least it will be treated as income and subject to the surplus income rules. While funds are held in a pension or retirement fund they are protected under the alw – as soon s you remove them from the fund they lose that protection. I’d talk to my trustee before cashing out any pension or retirement funds…
If someone got a class action settlement payout while they were under bankruptcy, would that be considered as surplus, would it be taken to pay the bankruptcy, or is this payout untouchable?
It will depend on the nature of the settlement. At the very least you should contact the licensed insolvency trustee that you are working with and ask them. They’ll want to read the settlement document to see exactly what it is for and therefore whether or not is should be treated as income (subject to the surplus rules), as an asset (subject to seizure) or if it cannot be touched (if it is for pain and suffering or certain other types of payments).
Hi, I declared bankruptcy and was to be automatically discharged in October but became hospitalized and my family was not aware of my bankruptcy status. I failed to submit a report and therefore did not meet my obligations within the timeframe as agreed upon. Once I was able to complete it I did so and all payments have been made and are complete. I have not received my discharge yet and am not scheduled to be until April 6, my question is, I have received a significant accident settlement within the last week for injuries that caused me to become sick and have to even be in this mess in the first place. I will obviously report it to my trustee but Im wondering how this will impact everything.
Hi Sher. You will need to talk to your trustee to determine the implications, because it will depend on the nature of the settlement. Be sure to also advise your trustee of all medical expenses you have incurred while bankrupt, because that may lower the amount you are required to pay.
I am a creditor listed on the Claims Register for a Consumer Proposal. The person that filed owed $71,000.00 approx, and her total payment to all her creditors will be only $15,000.00. I am aware of a windfall she will be receiving from the foreclosure of her house, and the trustees will receive close to $41,000.00 on her behalf.
The proposal package does not have a windfall protection clause, and I wonder if the trustees are obligated to disclose this information to the creditors and if they should redistribute the dividends as they will have an excess of $25,000.00 which could significantly improve the defaulted debt. I am owed $23,500.00 and only will receive $3,000.00 from this proposal, while this person will profit $25,000.00 if the trustee refunds the money held in court. Please advise.
The thing to do is to request a creditors’ meeting and try for some form of amendment to the proposal terms. If the 45-day voting period has elapsed, it is a bit more complicated, but still possible. If you are concerned you won’t get a straight answer from the trustee, try reaching out to the Official Receiver instead.
Thank you for your response. The proposal was filed February 2021 and at the time was no expectation of this individual receiving a windfall from the foreclosure of the house. The trustee said they will be returning the remainder of the funds to her, which I found not ethical as in my personal situation, I will be receiving $3000 out of the $23500 she owed while she will receive a $35000 bonus after filing her proposal. What could be the proper way to request a creditor’s meeting after 18 months of her filing, the trustee seems not to be willing to entertain this option. I will appreciate any guidance.
Regards.
J.R
If the trustee is not responsive your next avenue is to contact the Office of the Superintendent of Bankruptcy (OSB) and ask them to review the file. If enough of the creditors ask for a meeting a meeting one will be scheduled.