One of the first questions asked when people are thinking about declaring bankruptcy is “Will I lose everything” after I file for bankruptcy. It’s often assumed that a trustee will seize everything you have and sell it when you go bankrupt.
Myth: I will lose everything by declaring bankruptcy. The trustee will take my car, my house and even seize my bank account.
Truth: While the bankruptcy laws around what you can keep in a bankruptcy vary from province to province, all provincial governments have set limits on what a trustee can take. These limits are called personal bankruptcy exemptions and for the most part cover the necessities of life. The assets you can keep in a bankruptcy, within certain dollar limits, include:
- household goods (food, furniture etc.)
- personal belongings (clothing)
- your car
- tools of the trade
- pensions and retirement savings
Bankruptcy Exemptions Explained
In most provinces you can keep a reasonable amount of household furniture and appliances after you file for bankruptcy. The value is not what you paid for the items, it’s what they would be worth today (in a yard sale or advertised on internet sites such as Kijiji). In almost every case you don’t need to get any items appraised, you just sign a sworn document stating what you believe the combined value to be.
This includes items like personal clothing and in some provinces small personal items like jewellry. Again, the value is not what you paid, it’s what would they be worth if you sold them today. Clothing is generally worth very little (if anything). Most jewellery carries more of a sentimental value than a significant dollar value, but if you feel you have some expensive jewellery you can have it appraised for cash value, which is always significantly less than insurance or store price value. In all the bankruptcies I’ve helped administer, I’ve never had to take possession of someone’s household goods or personal effects.
Can I Keep My Car in A Bankruptcy?
This one gets a lot of people’s attention. If you own a vehicle outright, you can keep it as long as the value falls below the provincial bankruptcy exemption limit. Even if it’s worth more, you can keep it, but you’d have to pay the trustee the difference between what the car is worth and the exempt limit. For example, in Ontario if you owned a vehicle worth $7,000 you would have to pay the trustee $400 extra in the bankruptcy to keep your car since the exemption limit for a vehicle in Ontario is $6,600. If you’re not sure on your vehicle’s value you can have it appraised or we can help by looking up the Canadian Black Book value for most vehicles.
If you owe money for the vehicle (and what you owe is more than the vehicle is worth) then you can keep it as long as you can continue to make your monthly car loan payments in addition to your required payments in your bankruptcy.
One of the keys here is the word “one” motor vehicle. If you have a second vehicle in your name that’s owned outright, the exempt limit does not apply in any way to the second vehicle so you’d have to surrender that vehicle or pay the trustee the full value of what it’s worth if you wanted to keep it (essentially you’d be buying it back from the trustee).
Can I Keep My House In A Bankruptcy?
One of the biggest myths surrounding bankruptcy is that you automatically lose your home if you file bankruptcy. In most cases, where you hear about someone losing a house in a bankruptcy it’s because the homeowner wants to give it back to the mortgage holder to get out of a bad mortgage or negative equity situation, not because the trustee took it.
Having said that, the rules do get complicated. Some provinces have an exemption for a certain amount of equity in your home, others do not. Even if the equity in your home exceeds the exemption limit, you may still be able to keep your home if your declare bankruptcy. Here’s why…
The concept of bankruptcy is that you’re assigning control of your assets to a trustee in exchange for the elimination of your debts. However the trustee will only have an active interest in selling a home if the trustee believes the house can be sold for profit (ie there’s equity above your limit) after paying all closing costs including the mortgage, outstanding property taxes, realtor’s commissions, legal fees and penalties to break a mortgage.
If you do have realizable equity in your home you may want to explore other options with your trustee like a consumer proposal which will allow you to settle your debts and keep your home. If you do not have any equity in your home, the trustee will leave it up to you and the mortgage company to decide what to do. Typically if you are able to maintain your monthly mortgage payments the mortgage lender will usually allow you to keep your home.
Tools of your trade
Again, most provinces recognize that even after you file for bankruptcy you still need to be able to earn a living. If you have tools, equipment or machinery that you use specifically to earn income (even if you are self-employed and own a business) you can keep those items if they are worth less than the provincial limit. As with household goods and personal belongings, the value is not what they were worth when you bought them, it’s what they are worth if you were to try and sell them second hand.
RRSP’s, Life Insurance & Pensions
All Canadian provincial laws protect pensions very well. The Pensions Act of Ontario for example states that a pension is not subject to execution or seizure, so therefore a trustee in bankruptcy cannot seize the fund and distribute it to your creditors.
New rules now allow your to keep your RRSP investments except what you’ve contributed into the RRSP in the last 12 months leading up to the bankruptcy. As an example, if you have an RRSP with $10,000 in it and you’ve put in $500 in the last year, the trustee would only be able to take out the $500 and you’d keep the remaining $9,500.
In most cases, life insurance & pensions are also exempt from seizure in a bankruptcy but be sure to bring us a copy of the policy to your initial consultation so we can review the documents to let you know for sure if yours is at risk or not.
Most but not all provinces have exemptions for health and medical aids. Talk to your trustee about your particular situation.
What You Cannot Keep
Savings Bonds, TFSA’s and RESP’s can be seized in a bankruptcy as they are essentially cashable savings accounts. However, most people contemplating bankruptcy have depleted their savings accounts many months before filing a bankruptcy in an effort to avoid bankruptcy so this is not usually an issue. If you still have savings a consumer proposal might be a better option for you than bankruptcy as you may be able to keep some or all of your savings in a proposal.
Most people worried about losing an asset in a bankruptcy would choose to file a consumer proposal instead. In a consumer proposal you can keep control of all your assets regardless of their value.
Bankruptcy exemptions, and what you keep or lose in a bankruptcy in Canada, can be quite complicated. Talking with a Bankruptcy Canada Trustee over the phone or in person to review your options is always free. Our trustees offer convenient hours and the initial consultation is always free with no obligation to you. Contact a bankruptcy trustee in your area if you have questions.
Read about other common bankruptcy myths:
Myth #1: Everyone Will Know I Filed Bankruptcy?
Myth #3: A Bankruptcy Trustee Only Does Bankruptcies
Myth #4: All My Debts Are Discharged In A Bankruptcy
Myth #5: I’ll Never Get Credit After Bankruptcy