Bankruptcy scares everyone because they think they are going to lose everything. In truth, most bankrupts don’t lose any assets because often people in financial trouble don’t have assets of value. These have been liquidated long ago or they just could not afford them in the first place. However, in the event you own some assets, let’s talk about what is protected in a bankruptcy and what is not.
Let’s start by identifying the types of things we’re going to talk about: your assets are the things you own. If you file for bankruptcy the first thing that’s done is we sort the things you own into two categories – things that are protected under bankruptcy law and things that are not. This allocation is based on bankruptcy legislation. It’s not up to the trustee to decide. Federal and provincial legislation defines what you keep and what you have to surrender to the bankruptcy trustee.
Things that are protected under the law include personal possessions, furnishings, tools used to earn income, life insurance, your car, and most RRSPs. If you own one of these things then it probably won’t be factored into your bankruptcy as they are protected under the law.
Your car is protected up to a certain dollar amount. If it is worth more than that then you may have to pay an amount equal to the excess in order to keep your car if you file for bankruptcy.
An RRSP and bankruptcy are a bit peculiar in that any money you have deposited into an RRSP in the 12 months immediately prior to filing for bankruptcy may be seized, depending on the type of RRSP you have. The best thing to do is bring a copy of your RRSP with you when you meet with a trustee and ask them to tell you whether or not it is protected – most are.
Everything else you own may not be protected under the law, but before you become concerned, keep this in mind: your creditors are only interested in things that may be turned into cash. If selling the item won’t produce any cash then it won’t be sold. And selling means liquidation value. Not what you paid for the item in the first place.
The most common thing you might own that is not completed protected is your home. There are provincial differences as to how much of your home equity is protected. If your home equity is considered an asset under bankruptcy law, your house can be sold and after paying off the mortgage(s), property taxes, legal fees, commissions, etc, there is any money left over then that money will be paid into your bankruptcy for the benefit of your unsecured creditors. Most people in this situation file a consumer proposal instead of bankruptcy.
As you can see, bankruptcy does not take everything you own. While you will have to make payment during your bankruptcy, you will not have to hand over everything.