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.