Exempt vs. Non-Exempt Assets in a Bankruptcy in Canada

Bankruptcy Exemptions Your Guide to Exempt vs. Non-Exempt Assets in a Bankruptcy in Canada

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Canadians are often reluctant to consider bankruptcy even when they are in a dire financial situation. They’re concerned that they could lose everything, but that is one of the most common misconceptions about bankruptcy. In this article, we discuss personal bankruptcy exemptions, what you get to keep vs what assets you must give up.

Consumers have a number of protections when they face insolvency. Provincial law outlines exempt assets that are not affected by filing for bankruptcy. Knowing with certainty what you get to keep and what you may have to sell can give you the confidence to seek bankruptcy assistance when you need it.

Avoiding bankruptcy may still be your goal, and there are ways you can get out of debt without having to go down that path. However, once you know which assets you can keep with confidence, it may not seem like such an intimidating prospect.

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Ontario Bankruptcy Exemptions: Assets You Get to Keep

Bankruptcy exemptions in Ontario are designed to give debtors a certain level of protection from creditors. A number of personal and essential belongings are sheltered from insolvency proceedings by bankruptcy laws in Ontario, and you can move forward knowing that they’re safe. Exempt assets include:

  • All of your clothing
  • One motor vehicle worth up to $7,117
  • Household furniture, equipment, and food up to $14,180
  • Tools or equipment used to earn a living up to $14,405
  • RRSP and RRIF contributions except those made in the 12 months before filing for bankruptcy
  • Most pensions and life insurance policies
  • Equity in your home up to $10,783 (although there is no exemption if your equity is above the limit)

Amount limits are increased each year for inflation. The above figures are for 2021 as set in the Regulations of the Execution Act.

Equity is the value of an asset left after repaying secured loans (i.e., your mortgage or car loan). For example, if you have a mortgage of $650,000 and your home is appraised at $700,000, you have $50,000 of equity in the property. Equity is built both by paying down your mortgage and when the value of your home rises.

Exempt Assets Under Federal Law

In addition to these Ontario bankruptcy exemptions, some property is also protected by federal law. Federal exemptions are laid out in the Bankruptcy and Insolvency Act. They include:

  • GST/HST credits (other than for unpaid trustee fees)
  • RRSP and RRIF savings
  • Property you hold in trust for another person
  • Registered Disability Savings Plan (RDSP) savings
  • CERB, CRB, Child Tax Benefit, and HST payments are not considered income when Surplus Income is calculated for people filing for bankruptcy

Non-Exempt Assets: Assets You May Have to Sell

Non-exempt assets are those that you most likely will not get to keep. These assets are surrendered to the Licensed Insolvency Trustee who handles their sale. The proceeds after any secured loans on those assets are paid off are then distributed to your unsecured creditors. Non-exempt assets include:

  • Excess equity above the exemption in the first vehicle plus any additional vehicles
  • Investments not protected in a registered account (this includes TFSA accounts)
  • Cash in your bank account above a reasonable amount required to pay for short-term living costs
  • Jewellery, coin collections, and valuable art
  • Inheritances
  • Second homes or vacation properties
  • Tax refunds on income earned leading up to the filing date

Bankruptcy is not meant to be a punishment. Non-exempt assets are sold in order to give your creditors a chance to recoup their losses. Once the proceeds from the sale of non-exempt assets are distributed to your creditors and Surplus Income payments have ended, any remaining funds that you owe are discharged.

If you’re concerned about the non-exempt assets you could lose, talk to us about your concerns. As debt professionals in Toronto and other cities in Ontario, the Licensed Insolvency Trustees at David Sklar & Associates can help you find the best path out of debt for your circumstances.

Trying to hide or shelter non-exempt assets can lead to criminal charges. When you file for bankruptcy, you will have to disclose any information regarding property that you recently had before filing. If it was sold, those funds must be accounted for, and it may need to go to the bankruptcy estate to repay your creditors.

Bankruptcy Exemptions in Other Provinces

The details are slightly different across Canada, and if you live in another province, you should expect different exemption limits. For example, in Alberta, equity in your principal residence up to $40,000 is exempt, while in the Northwest Territories, up to $50,000 is exempt. In British Columbia, $9,000 in equity is exempt unless the property is in Vancouver or Victoria, in which case $12,000 is exempt. Meanwhile, Nova Scotia and New Brunswick have no residential property exemption.

Can You Keep Your Home When You File Bankruptcy?

Keeping your home is understandably going to be a top priority before you deal with debt, but you shouldn’t ignore debt problems because you’re worried about losing your home. Once you start missing payments, collectors can take legal action against you, such as a wage garnishment or bank account garnishment. When you start losing control of your finances, there’s a cascading effect that could affect your ability to pay your mortgage.

Consider a consumer proposal as an alternative to bankruptcy if you are otherwise in danger of losing your home.

What Happens to Your Car in Bankruptcy?

Whether or not you can or should keep your car in bankruptcy depends on the value of your vehicle, the state of your auto loan, and the reasons you’re unable to keep up with debt.

The value of your car depreciates rapidly, which may help you hold onto your vehicle if you have to file for bankruptcy. When you need your vehicle in your day-to-day life, it can be a relief knowing that it’s not at risk because of your bankruptcy.

However, automobile ownership can also be expensive. When you’ve purchased a more expensive car than you can afford, it can be difficult to fix that mistake. Often vehicle owners are “upside-down” on their loan, meaning that the value of the vehicle is less than the remainder on the loan. For those planning on filing for bankruptcy, they can voluntarily surrender their vehicle, converting the remainder of the loan into an unsecured debt, which can then be discharged in bankruptcy.

File a Consumer Proposal: How to Keep All Your Assets

If you own significant non-exempt assets that you don’t want to lose, bankruptcy may not be the best option for you. Instead, you can protect your assets with a consumer proposal and still deal with your unsecured debts.

Consumer proposals have become a more common method of going through insolvency since they were introduced. In 2019, 60% of consumer insolvencies were consumer proposals.

A consumer proposal provides legal protection from creditors. It will stop wage garnishments, court judgements, and collection calls from your creditors, and it will discharge you from a large amount of debt if you cannot afford to pay it. The difference between consumer proposal and bankruptcy is that instead of having to give up any assets to repay your creditors, you agree to settle part of your debts through a repayment plan.

You will work with the Licensed Insolvency Trustee to find a compromise that suits both you and your creditors. The goal is to find a monthly payment that you can afford, but that will also be fair to your creditors and provide them with adequate funds compared to what they could receive if you filed for bankruptcy instead.

A consumer proposal may last up to five years. When you enter into one, interest charges no longer accumulate on the debts that you owe. Any debts not covered by the amount agreed to repay are discharged.

In many ways, a consumer proposal is simpler than bankruptcy. You agree to everything beforehand, and there are no surprises. Your monthly payments do not change even if your income increases or if you receive a windfall such as an inheritance.

A consumer proposal allows you to hold onto your non-exempt assets while still getting out of debt. They can benefit anyone facing high debt who earns an income and has assets they want to protect, such as home equity.

A Licensed Insolvency Trustee will work with you to find out whether bankruptcy or a consumer proposal would be better in your circumstances. Bankruptcy is meant to be a fair process that can relieve debt while also providing some compensation to creditors. Explore your options now.

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If you are overwhelmed by debt, call us at 1-844-962-9200 to book a FREE, confidential appointment. We will review your financial situation in detail and discuss all of your options with you. Alternatively, you can fill out the form below and our team will reach out to you. 

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