BC Bankruptcy Exemptions: Will I Lose Everything if I File for Bankruptcy?
One of the misconceptions about filing for personal Bankruptcy is that a person thinks that they may lose valuable assets. In fact, the stated intent of the Federal legislation is to provide the honest but unfortunate person with a fresh start. How then could a person make any progress with a fresh start if they had nothing to start with?
As a result, the Federal Government has allowed each Provincial Government to set a certain amount of exemptions. This means that you can get debt relief and keep certain assets. Will you lose everything if you file for bankruptcy? No, you won’t. And you might be surprised by what you can keep due to the BC Bankruptcy Exemptions.
The Bankruptcy and Insolvency Act – Exempt Assets
The Federal Government is responsible for setting insolvency laws in Canada via the Bankruptcy and Insolvency Act (BIA). In order to allow the person a fresh start, Bankruptcy laws allow for the retention of a certain amount of necessary assets to be retained for future living.
However, due to regional differences, the Federal Government allows each province to set its own exemptions. As a result, exemptions differ from province to province. In BC, the following is a list of the most common exemptions. This means that creditors can’t take the following things away from you:
- Household goods (garage sale value) – $4,000
- Tools of the trade – $10,000
- Motor vehicle – ($2,000 for family maintenance debtors) $5,000
- Home equity – $9,000
- Certain life insurance policies
- Most RRSP accounts – except for contributions 12 months prior to the date of bankruptcy
- Plus all necessary clothing and all required medical aids (for debtor or a dependent)
Purchase Cost vs Market Value
We use market value for valuations which is often much much lower than the purchase cost. Also, value to the person is often higher in their eyes than what it would sell for at auction.
What About Secured Creditors?
In a Bankruptcy, a secured creditor is a creditor that is holding a properly registered charge (filed under the Personal Property Security Act) over assets pledged as security for a debt. For example, this may be a car loan which was financed or a mortgage financed through a bank or lending institution. In the case of the mortgage, the house would be registered in Land Titles with the secured lender showing an entitlement by placing a lien against the property.
Generally, a secured creditor would have the option of realizing their security, or alternatively making whatever new arrangements with the debtor as is agreeable with the debtor. However, most often you are able to continue on with the mortgage payment or car loan and would not lose the asset.
Others may choose this opportunity to allow the vehicle finance company to repossess the vehicle (which would be the end of the loan), or have the mortgage company proceed to foreclosure which would result in any shortfall being absorbed by the Bankruptcy.
If there is equity in a secured asset, then exemptions still apply and you would be entitled to the sales proceeds up to the applicable exemption amount. For example, if a house or car was sold resulting in credit once the secured creditors were paid in full, the exempt amount is paid back to you, and the remaining credit balance, if any, would be available to the unsecured creditors.
Other Regulations and Exemptions Under Provincial and Federal Law
- Property located on reserve is by the Indian Act exempt from seizure.
- The British Columbia Exemptions Act grants an exemption for the goods and chattels of the debtor to a value fixed by the statute (see list above).
- A person’s quarterly GST credits that may come into the Bankruptcy may be returned to them at the end of the proceedings depending on the amount of other receipts that have come in.
- Deferred Profit Sharing Plans as defined by the Income Tax Act are not property that would be available for distribution among a bankrupt’s creditors.
- Registered Retirement Savings Plans (RRSP) is a retirement savings plan that has been accepted by the Minister of National Revenue for registration for the purposes of the Income Tax Act. It is a tax deferral device. They are exempted from the bankrupt estate, except for the possibility of a 12-month claw-back of contributions in the 12 months prior to the date of Bankruptcy. This is designed to allow RSPs the same standard as pensions.
- Pension and Superannuation Benefits are regulated by the provincial pension acts. In the Province of BC they are not subject to seizure, cannot be collapsed, and therefore do not form property of a bankrupt estate. However, this income has to be reported as monthly income for the period of Bankruptcy.
What Other Assets Are Classified as Exempt or Non-Exempt?
- Pension benefits such as the CPP and the OAS are not considered assets however have to be reported as income during the period of Bankruptcy.
- A RESP (Registered Education Savings Plan) is considered property of the bankrupt therefore vests with the trustee, however only the actual contributions into the plan are made available to the creditors. The government grant portion is not considered an asset, and is retained by the debtor.
- The Child Care Benefit issued by the government is not considered an asset or income because it is for the benefit of the child. It does not have to be reported as income. However, if a bankrupt receives Child support, although is not considered an asset, it has to be reported as other household income in the family unit.
- Stock certificates, trading accounts, money in a financial institute are considered assets and must be realized by the trustee for the benefit of the creditors.
- Cash surrender value of a life insurance policy in which the bankrupt is insured and it is payable to the estate can be redeemed with the cash surrender value paid into the estate. Usually, the policy will not be collapsed, providing the premiums are kept up to date.
- A term life insurance policy does not have any cash surrender value and pays out only upon the death of the life insured. It is not considered an asset of the estate, unless the bankrupt dies while in Bankruptcy and the policy was payable to the estate, and not a designated beneficiary such as a spouse, child, grandchild or parent of the person whose life was insured.
- In Bankruptcy, lawsuit damages that arise from pain and suffering, such as a motor vehicle accident, devolve on the bankrupt and are exempt, however damages for loss of income or earning capacity are not exempt and must come to the estate for the benefit of the creditors.
- Income received under a Will or Trust is considered property of the bankrupt and will vest with the trustee for the benefit of the creditors. Sometimes, an inheritance or windfall is sufficient to pay the unsecured creditors in full. In this situation, the remaining balance would be paid to the debtor, net of Licenced Insolvency Trustee fees and expenses which are regulated by the BIA.
- If property is owned jointly, a bankrupt will be entitled to his or her exemption in respect of their percentage interest in the property.
In summary, assets are unique to each individual, and exemptions are applied to avoid undue hardship.
Understanding the BC Bankruptcy Exemptions is an important part of choosing which debt solution is appropriate for you. The exemptions are also vitally important in calculating what is the proper amount to offer in a Consumer Proposal.
For a more thorough review of your debt situation and which exemptions may apply, please contact us to set up a complimentary, confidential assessment. We have decades of experience and will provide you with information on practical options to help you get relief from your debt.