When you file personal bankruptcy in Canada, you are permitted to retain certain assets while others are subject to seizure by your bankruptcy trustee. Your trustee has a responsibility to ‘realize’ on these non-exempt assets, which means that they have to turn the value of these assets into cash to be distributed to your creditors. How this happens depends on the type of asset as well as options you can discuss with your trustee.
Assets Exempt From Seizure and Sale in a Bankruptcy
The specific personal bankruptcy exemptions are slightly different in each province, but in general you are permitted to retain basic household furnishings and personal goods. So, when you file personal bankruptcy, you will not lose your furniture, clothing and other household items.
It’s also important to know that secured debt is not included in a bankruptcy or consumer proposal in Canada. That means if you own a car or a house that is fully financed, you will be able to keep these assets provided your mortgage or car payments are up to date, and you continue to make the payments to your secured lender.
In all provinces you are permitted to keep your RRSP, except for any contributions you have made in the last year.
Who Decides if my Assets will be Sold?
When you file personal bankruptcy, your trustee reviews all of your assets, and they decide whether or not your assets will be sold, based on the rules in your province.
This is not a “one way” decision. You are involved in this process, so you should discuss your options with your personal bankruptcy trustee.
In addition to legislated provincial and federal bankruptcy exemptions, you can still work with your trustee to keep assets they would otherwise have to sell.
For example, under bankruptcy law an RESP is an “asset of your bankruptcy estate”, which is a fancy way of saying that it is the trustee’s job to turn that RESP into cash. The funds are then distributed to your creditors as part of the bankruptcy process. However, that does not mean your trustee will automatically cash in your RESP.
Your trustee will find out from your RESP company how much your bankruptcy estate would get if the trustee cashed it in (after the RESP company repays any government grants, and other fees and expenses). You would then have the option of “buying back” the RESP from your trustee rather than having the RESP redeemed by your trustee.
Here’s an example:
Jane Smith has an RESP for her daughter with a total value of $1,200. The RESP company has advised the trustee that if the RESP is redeemed the trustee will receive $900, after paying back the $200 government grant and a $100 administration fee. Jane would like to keep her daughter’s RESP, so she offers to pay the trustee $100 per month for 9 months while she is bankrupt to “buy back” the $900 value of the RESP.
This is an acceptable solution for everyone. The trustee realizes the same $900 they would have received if they cashed in the RESP, and Jane gets to keep the RESP which to her is worth $1,200.
If you have a very valuable house, car or investment it will be sold in your bankruptcy, so before filing bankruptcy you should ask your trustee to fully explain all of your options to avoid selling your assets. Two options to consider would be to “buy back” your assets as described in the example above, or to file a consumer proposal to prevent your assets from being sold in a bankruptcy.