If you’re in a dire financial situation because of unpaid debts, bankruptcy may be the best solution. However, you may be wondering what happens to your assets after filing for bankruptcy. Some questions on your mind may include:
- “What can creditors take during a bankruptcy in Ontario?”
- “Do I have to give up all the money in my bank account?”
- “Does filing bankruptcy mean I must sell my home and car?”
If the thought of losing your assets is too much to take, we have some reassuring news – you won’t lose everything by filing bankruptcy!
In this article, we’ll break down the assets you get to keep if you declare bankruptcy in Ontario and the ones you may have to give up to creditors. We’ll also explain how you can retain 100% of your assets by filing a consumer proposal, Canada’s most popular alternative to personal bankruptcy.
Ontario Bankruptcy Exemptions: Assets You Get to Keep
Ontario’s bankruptcy laws prevent creditors from taking everything you own to settle your unpaid debts. Assets that creditors cannot seize are known as exempt assets and are outlined in the Execution Act of Ontario.
Here are the assets you can keep during an Ontario bankruptcy:
- All clothing for you and your dependents (unlimited value)
- One motor vehicle with a value not exceeding $7,117
- Household furnishings, equipment, and food up to $14,180
- Tools and equipment used to earn a living up to $14,405
- Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF) contributions, except those made in the last 12 months of your bankruptcy filing date
- Equity in your home under $10,783
- For farmers: livestock, fowl, bees, books, tools, and implements with a combined value of up to $31,379
The annual dollar limits for exempt assets are adjusted annually for inflation. The figures above are current as of 2021 as set in the Regulations of the Execution Act.
What happens if specific assets you own, such as a car, tools, or home, exceed the Ontario bankruptcy exemption limits? Does that mean you must sell them and hand over the proceeds to your creditors?
Ordinarily, the answer is “yes.” Creditors can claim any asset that exceeds the exemption thresholds to pay off their debts. However, there’s an exception to this rule: you can keep such an asset if you agree to pay out the non-exempt portion in cash. Your trustee will add this amount to your bankruptcy estate, which will eventually transfer to your creditors (more on this later).
Assets exempt from bankruptcy under federal law
In addition to Ontario bankruptcy exemptions, some property is shielded from creditors at the federal level. Federal exemptions are laid out in the Bankruptcy and Insolvency Act (BIA) and include:
- GST/HST credits (other than those for unpaid trustee fees)
- Money held in an RRSP, DPSP (deferred profit sharing plan), and RRIF account (but payments received from the account are NOT exempt)
- Money held in Locked-in Retirement Accounts LIRA)
- Money held in a Registered Disability Savings Plan (RDSP), including any payments paid out
- Property you hold in trust for another person
- CERB, CRB, Child Tax Benefit, and HST payments
- Most pension plans with life insurance policies
Non-exempt Assets: Assets you may have to sell
Non-exempt assets are those you’ll likely have to give up after declaring bankruptcy. You must surrender these assets to your Licensed Insolvency Trustee, who will arrange for their sale. Following the sale, they’ll distribute the proceeds to your unsecured creditors.
Non-exempt assets in Ontario include the following:
- Secondary vehicles
- Investments held in a non-registered account
- Money held in a chequing account (you can keep a reasonable amount to cover day-to-day needs)
- Tax-free savings accounts (FSA)
- Registered Education Savings Plans (RESP)
- Cash held in a bank account beyond an amount reasonable to pay for short-term living expenses
- Jewelry, coin collections, and valuable art
- Second homes and vacation properties
- Rental properties
- Tax refunds received in the year of the bankruptcy filing
- Equity in your home and other assets that exceed the exemption limits
As distressing as it can be to lose your personal possessions, bankruptcy isn’t meant to be a punishment. Surrendering non-exempt assets gives your creditors a chance to recoup their losses. Once the proceeds from the sale of these assets settle your debts and surplus income payments have ended, your trustee will return to you any remaining funds.
Trying to hide or shelter non-exempt assets can lead to criminal charges. When you file for bankruptcy, you must disclose details about any property you recently owned before filing for bankruptcy. If you sold it, you must report the money you received to your trustee, as it may become part of your bankruptcy estate to compensate creditors.
Can you keep your home when you file bankruptcy?
In Ontario, you can keep your home after filing for bankruptcy if its equity is below $10,783. If your home equity is higher than this threshold, you have two options:
- “Buy back” the equity by paying your trustee the excess cash, which they will add to your bankruptcy estate. By doing so, you’ll get to keep your principal residence with no strings attached.
- Surrender your home to your trustee, who’ll arrange for its sale and distribute the proceeds to your creditors (after paying off the mortgage). While not a pleasant choice, sometimes giving up your home makes the most financial sense.
Remember: filing for bankruptcy doesn’t automatically mean you lose your home. However, if you’re deeply concerned about this possibility, consider a consumer proposal as a bankruptcy alternative. Learn more about the impact on your home when filing for bankruptcy in Ontario.
What happens to your car during bankruptcy?
Whether or not you can or should keep your car in bankruptcy depends on how much your vehicle is worth. If its market value is less than $7,117 (after deducting the amount you owe on the auto loan), you’re free to keep it. However, if its value exceeds this limit, it becomes available to creditors.
As with your home, you have two options:
- Pay out the difference between the exempt and non-exempt value to your trustee, who’ll then include the funds in your bankruptcy estate. You can then retain ownership of your vehicle with no further financial obligations.
- Surrender your vehicle to your trustee, who’ll sell it on your behalf and distribute the proceeds to your creditors. Depending on how much equity you have in your car, this may be the wisest choice.
Vehicles tend to depreciate rapidly, so there’s a good chance you’ll be holding onto your vehicle if you file for bankruptcy compared to your home.
However, automobile ownership can also be costly. If you’ve purchased a car using a loan you cannot afford, it can be difficult to fix that mistake. You may find that your car loan is “upside-down,” meaning that your loan balance exceeds your vehicle’s value.
In this scenario, consider voluntarily surrendering your vehicle before declaring bankruptcy. By doing so, the remainder of the loan will convert into an unsecured debt, which you can discharge through bankruptcy.
What happens to my employment income?
Creditors cannot target the income you earn from your job during bankruptcy, so you keep 100% of what you take home.
However, you must report your monthly income and expenses to your trustee. If your earnings exceed the prescribed limit under the BIA, you’ll have to make surplus income payments as part of your bankruptcy.
How much money can you keep in my bank account during bankruptcy?
The money held in your bank account is a non-exempt asset. However, the BIA allows you to keep a reasonable amount to cover critical expenses, such as food and rent.
What is considered a “reasonable amount” is at the discretion of your trustee. They’ll assess your living costs and determine a suitable amount of money you can maintain in your bank account.
Filing a consumer proposal: the bankruptcy alternative that lets you keep all your assets
Suppose you own significant non-exempt assets you fear losing. In that case, bankruptcy may not be the ideal way to obtain debt relief. Instead, you can file a consumer proposal, which offers similar benefits to bankruptcy but allows you to retain 100% of your assets.
The main difference between a consumer proposal and personal bankruptcy is that instead of giving up non-exempt assets to your creditors, you agree to pay them a portion of your unsecured debts. Your trustee will consolidate your debts and negotiate a monthly payment plan you can afford while being fair to your creditors. A debt payment plan under a consumer proposal may last up to five years, and no interest will accumulate on the balance you owe.
Final thoughts on assets you can keep during bankruptcy in Ontario
Depending on the severity of your debt problems, declaring bankruptcy may be the most sensible way to eliminate them and rebuild your finances. But it’s also a solution that endangers your assets, which creditors are entitled to seize and sell to pay down your debts.
Luckily, you won’t be left empty-handed, as bankruptcy exemptions in Ontario and under federal law allow you to keep enough assets to meet your daily needs. Always remember: you don’t lose everything by filing for bankruptcy.
However, if you decide to go down this route, understand that you must legally surrender non-exempt assets to creditors. You may have to sell your home, car, and other cherished valuables to discharge your unsecured debts.
Personal bankruptcy works best if your debt situation is dire and you have no chance of repaying what you owe. Not surprisingly, it’s also the superior debt relief solution if you own relatively few non-exempt assets.
A consumer proposal is better if you can repay some of your debts, as it requires ongoing monthly payments over five years. It’s also a preferable option if you own many non-exempt assets.
Not sure whether bankruptcy or a consumer proposal is right for you? A Licensed Insolvency Trustee can work with you to determine which debt relief solution proposal best fits your needs, goals, and budget. At David Sklar & Associates, we’ve helped thousands of individuals across Ontario fix their debt woes and build a brighter financial future. Contact us today for a free, no-obligation consultation – you owe it to yourself!