Exempt Assets Under Bankruptcy Insolvency Act: Good Credit Versus Bad Debts

A former colleague of mine used to send out letters to consumers with two specially packaged Tylenol attached, along with a brief message that said, “Taking these two tablets will make your headache disappear, but it will not provide permanent relief.” 

If debt were a brand today, it would find itself in the same place as Tylenol – associated with lethal toxicity over prolonged use yet without a corresponding loss in the value of the brand. Debt, any way we look at it, is inevitably a one-way trip to some form of bondage. And unless we do something about debts, it causes headaches and associated stress.

The stark reality is that a zero-debt existence is impossible for most people, anywhere. Many Canadians are in a sense, insolvent, meaning that their liabilities (debts) exceed the value of their assets. This does not necessarily mean all insolvent people are bankrupt. To file for bankruptcy you must you owe at the least $1,000 in debts, have more liabilities (debts) than assets and cannot maintain payments on the debt as it falls due. Only when an insolvent person makes a voluntary Assignment in Bankruptcy can he or she be said to be bankrupt.

While society is becoming increasingly dependent on the use of credit to make purchases, businesses likewise are demanding good credit before they are willing to provide goods and services to Canadian consumers. Credit is necessary to establish you and to make you known to lenders. Without some form of credit, you do not exist in the financial system and when you have credit, it is vital to maintain good credit.

There are four main types of credit that consumers have to contend with: revolving credit, charge card credit, service credit and installment credit. When any one of these good credit relationships turns bad, creditors start to demand their “pound of flesh” and debtors clamour for debt relief. Credit then, is a double-edged sword; a good score helps you get more credit, while a low or poor score puts you in a worse situation and lets loose the collectors who start to hound you day and night.  

The importance of maintaining good credit goes beyond purchases. Common sense dictates distinguishing between what constitutes good debt versus bad debt and secured debt versus an unsecured debt, as well as why it is necessary to maintain good credit at all times. Good credit shows financial responsibility and maturity. Secured debts are directly tied to an asset which could be seized by the lender in the event you defaulted on the terms of the contract. An unsecured debt is not tied to any specific asset. In brief, examples of ‘good’ debts are car loans, home mortgage and certain forms of investments, and here again realism, affordability and requirement to maintain funds for emergency are a pre-requisite. On the other hand, bad debts are those debts that originate from impulsive purchases and ramping up credit cards for gluttonous items to ‘keep up with the Joneses.’

As stated above, unsecured debts are not tied to any particular asset and creditors can take action against you in the event repayment default occurs. These debts are generally bank credit cards, department store cards, bank overdraft, bank or finance company loans, private lenders, personal income tax, directors liabilities (subject to certain conditions), Workers Safety Insurance Board WSIB and any GST / HST associated with a business.

Often people ask what assets they can keep in bankruptcy and what assets they would lose if they declare bankruptcy. The answer to this varies from province to province. Under the Bankruptcy & Insolvency Act (BIA), there are basically three kinds of “exemptions.” Examples of this are any property you hold “in trust” for other persons, any GST credit payments relating to your family needs and such others as defined by the province where you live.

Additionally in Ontario what a debtor is allowed to keep from being seized is legislated by the Ontario Executions Act. Examples of exemptions in Ontario are as follows:

Furniture: Household furniture is exempt up to a value of $11,300.

Clothing:  Up to $5,650

Tools of Trade: Exempt up to value of $11,300.

Farmers: Seed for up to 100 acres and others up to $28,300.

Vehicle: One automobile up to a value not exceeding $5,650, is exempt asset. If the vehicle you own is over the exempt limit of $5,650 and you want to keep it, you will need to discuss repurchasing the vehicle from the Trustee. However, if you are financing or leasing a vehicle, it becomes a secured asset. To keep it, you must ensure you are making regular payments as per the terms agreed to in the contract. The value of the vehicle does not really matter when leasing or financing.

Principal Residence: While there is no exemption, equity issue in the property warrants a deep understanding.While Trustees do not take away your house since it is mortgaged with a lending institution, any net realizable equity in house is not protected from seizure by the Trustee.  Only mortgage institution can seize your house in the event you default on mortgage payments. To ensure you are able to keep your house, it is absolutely necessary for you to keep your mortgage payments current and up to date. Your mortgage is considered to be an example of a secured asset.

Pensions, RRSPs, RRIFs, LIRA, DPSP (Deferred Profit Sharing Plan): Under the Pensions Act of Ontario, all Old Age Security (OAS) and Canada Pension Plan (CPP) are exempt from seizure by the Trustee and execution. Likewise all RRSPs, RRIFs, LIRA, DPSP are exempt except for contributions made in the 12 months before the bankruptcy filing.

Life Insurance, Segregated Funds and Annuities: All Individual and Group Term Life Insurance Policies are exempt from seizure under the Insurance Act of Canada. Segregated Funds are creditor proof and exempt from seizure.

Income Tax Owed to CRA: Personal tax liability is cleared when a consumer debtor makes an Assignment in Bankruptcy (i.e. files for bankruptcy). However, before filing for bankruptcy, it is necessary to ensure your tax filings are up to date. Any liens or wage garnishments filed by CRA will be lifted, provided there is no fraud.

Status of WSIB in Bankruptcy:Debt owed to the Workers Safety Insurance Board (WSIB) is a provable debt and is thus cleared in bankruptcy. However, it is necessary to ensure that all WSIB and CRA filings have been submitted prior to bankruptcy.

If you have any questions or concerns regarding your debts and exemptions or debts owed to CRA, contact MNP Ltd. to discuss your options.