What can I keep if I go bankrupt in Canada?
Yes! You can keep some of your possessions when you file for bankruptcy. These assets are called bankruptcy exemptions, because they are exempt from seizure by your bankruptcy trustee.
Why are some assets exempted?
Bankruptcy is a process that allows an honest but unfortunate debtor to get a fresh financial start.
The basic concept of a personal bankruptcy in Canada is simple. When you file for bankruptcy, you surrender your assets to your bankruptcy trustee. The trustee then turns those assets into cash, and distributes the money to your creditors.
However, to achieve the fresh financial start, you need to keep some dignity and some essential assets as a starting point for you and your family to rebuild your financial lives. These essential assets are your bankruptcy exemptions, and are defined in the law.
What sort of exemptions can I expect?
For most people who go bankrupt, the most important exemptions are limited amounts of:
- Food and heating fuel.
- Health aids.
- Your car.
- Your house.
- The tools of your trade.
- Farm land, animals, equipment, and supplies.
- Pensions or retirement savings.
The limits on the value of these exemptions are set by the provinces and territories. For a house, the limits are severe enough that most bankrupts must sell their houses to pay the excess value to their creditors.
An item such as a car would need an appraisal to confirm its value.
What if there is a mortgage on my house or car?
The exemption applies to the equity you hold. When there is a secured debt against your asset, the equity is the value of the asset after your unpaid debt amount is deducted.
For example, if you live in Alberta and have a car worth $15,000 and there is a secured loan against it with $11,000 owing, your equity in the car is $4,000. In Alberta, the exemption for a car is $5,000, so your car is exempted from your bankruptcy, your unsecured creditors cannot take it, and you can keep it.
However, even if your payments are up-to-date, the secured creditor might repossess your car if you go bankrupt. This varies with the current policy of the creditor. It is essential that you get advice from a bankruptcy trustee to avoid losing your car or house if it is possible.
What about my bank account?
Your bank account is not an exempt asset in bankruptcy. However, you should carefully arrange your banking in bankruptcy, to ensure that no inappropriate payments go to your creditors.
Conclusion: You can keep your dignity, but exemptions are complicated
If you file for bankruptcy, you can keep some assets that are essential for you to live your life, provide for your family, and make a living.
Exactly what you can keep depends on your personal circumstances and the province or territory where you live. Bankruptcy exemption rules are complicated, and change from time to time. Professional advice is essential.
You could keep all your assets (and avoid the matter of exemptions) by filing a consumer proposal - a negotiated settlement between you and your creditors. Although this option costs more than a bankruptcy, it may help reduce your feelings of guilt.
For more details on bankruptcy exemptions in your province and for answers to your other questions about bankruptcy and consumer proposals, please contact our personal bankruptcy trustee in your area and arrange for an initial consultation, free of charge. This federally-licensed professional will examine all the circumstances of your case and advise you on the options available to you.