How Assets And Income Affect Your Bankruptcy Claim

When you file for bankruptcy, it is helpful to first understand what the potential related costs of the process are and how they are determined. One component is the administrative fees of your Licensed Insolvency Trustee. A potential second and third component are determined based on the assets you own and the income you earn.

Trustee’s Fees

There are a number of expenses your trustee will incur as a result of filing your bankruptcy claim. These include the cost of submitting your claim to the Office of the Superintendent of Bankruptcy, the cost of his or her time and other administrative overheard. In consideration for their expenses, the Bankruptcy and Insolvency Act allows for your trustee to charge a “prescribed” fee for their services. You may or may not see this fee billed directly, as we will see below.

Documenting Assets

The first step in your bankruptcy claim will be to accurately document your assets. This process can often be a challenge. You may wonder what qualifies as an ‘asset’. Or you may not own your home, a car or anything else of significant value, and therefore believe you don’t have any assets to claim. You may also worry about losing items you cherish or things you need to replace once your bankruptcy is concluded.

To avoid confusion, potential legal trouble down the road and to provide the greatest number of options for concluding your bankruptcy, you are encouraged to fully disclose the fair value of all your possessions to your Licensed Insolvency Trustee. Even if that is limited to your clothing, furniture, appliances and miscellaneous personal effects; documenting everything ensures you don’t forget anything.

Once that step is completed, you and your trustee will then review the items you have listed. In the event you do own several high value assets, options will be discussed with you to either surrender certain assets to the Trustee for the general benefit of your unsecured creditors, or to retain them by paying for their fair value over time (if you can demonstrate the ability to do so).

It is also important to note that considerations exist in every province which allow for certain assets to be exempt (protected) from this process. The rule is intended to ensure you can get a fresh start by retaining the assets you need to earn your living during and after your bankruptcy process. However, what items apply to these exemption rules differs from province to province.

In addition, you are also generally allowed to retain assets that are pledged as security to a creditor – such as your car and home – provided you continue to pay the creditor for them. There are provincial variations in the amount of equity that you are allowed in these secured assets. If the equity exceeds provincial guidelines, you may be required to repurchase equity from the Trustee.

Surplus Income

During the course of your bankruptcy, you will be required to file monthly income and expense reports to the Trustee.

The government sets predetermined income thresholds for you and your family each year. Your household income and prescribed “non-discretionary” expenses are measured against these “Surplus Income Standards” throughout the duration of your bankruptcy. Half of anything you earn above that threshold (after deducting your proven non-discretionary expenses) will be payable to the Trustee for the general benefit of your creditors. If this is your first time filing for bankruptcy, this “surplus income payment” will be payable for 21 months. If it is your second or subsequent bankruptcy, it will be payable for 36 months.

If this surplus income obligation is sufficient to pay the aforementioned Trustee’s fees at the prescribed amount, you will not be responsible for paying their fees separately. You will pay only the larger of the two – plus any specific disbursements allowed for under the Bankruptcy and Insolvency Act or approved by the Court.

So, the greater your income and assets, the more you can expect a bankruptcy to cost. The maximum cost is capped at the amount required to pay your proven unsecured creditors in full, with 5% interest, plus Trustee fees and disbursements set by federal legislation. In this situation, a bankruptcy would obviously not be your best alternative and other options should be considered. The minimum cost of a bankruptcy would typically be the “prescribed” fees and disbursements of the Trustee.

Discharge of Bankruptcy

Once your administrative fees or surplus income requirement (if applicable) have been paid to your trustee, any non-exempt assets have been either surrendered to or re-purchased from the Trustee, your other statutory duties (such as financial counseling sessions) have been completed and the prescribed minimum time frame has elapsed, you will be eligible for a discharge from bankruptcy. At this time, your unsecure debts (i.e. credit cards, lines of credit, etc.) will be legally forgiven. Keep in mind that the Trustee will also be required to file your income tax return for your bankruptcy filing year prior to completing administration of your bankruptcy. They will retain any tax refund(s) for the general benefit of your creditors.

Though certain conditions may remain, you will be ready to start a new chapter in your life with a financial fresh start.

If you’re interested in learning whether Bankruptcy might be the life changing debt solution you’re looking for, contact MNP for a free consultation to find out how we can help.