The treatment of assets in a personal bankruptcy

One of the most common questions among consumer debtors contemplating Bankruptcy is, “what will happen to my assets?”

Upon filing a Bankruptcy, all assets of the bankrupt vest with the Licensed Insolvency Trustee (LIT), subject to the provisions of the Bankruptcy and Insolvency Act (BIA) and provincial laws governing exempt assets. This article will examine the treatment of some of the most commonly held assets in a personal Bankruptcy and discuss their exempt and non-exempt status pursuant to federal and provincial legislation — in this case, Ontario pursuant to the Execution Act as at April 2021.

Where an asset is not exempt from seizure, the bankrupt may opt to purchase the LIT’s interest in the asset for its appraised or fair market value. Alternatively, the LIT may sell the asset for the general benefit of the bankrupt’s creditors. Note that exemption limits are amended from time to time, and accordingly the exemption limits discussed below may change.

Personal effects

Personal effects, such as personal clothing, are an exempt asset. There is no dollar limit on personal effects such as personal clothing.

Household furnishings and appliances

There is an exemption limit of up to $14,180 for household furnishings and appliances.

Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Fund (RRIF)

Contributions made more than 12 months preceding the date of bankruptcy are an exempt asset, while those within the 12 months preceding the date of bankruptcy are not.

The LIT will confirm the amount of contributions within the 12 month period and the bankrupt may have the opportunity to repurchase the LIT’s interest or the LIT will instruct the financial institution to redeem the non-exempt amount for the benefit of the creditors. 

Locked-in retirement account (LIRA) and pensions

Funds held in a LIRA or pensions that are governed by the Ontario Pension Benefits Act are exempt from seizure.

Proceeds in a joint bank account

The funds in a joint bank account may be considered an asset of the Bankruptcy estate and subject to seizure. The bankrupt must provide proof that the funds are jointly held and demonstrate their share of the funds. If they are successful, only the bankrupt’s share of the funds will be an asset of the Bankruptcy estate.

Tax-Free Savings Account (TFSA)

Contributions made to a TFSA are not exempt and will vest with the LIT. 

Registered Education Savings Plan (RESP)

RESPs are owned by the plan holder, which is usually a parent. As this type of investment can be cashed in at any time, it is not exempt and will vest (less government grants and any other penalties or fees charged to cash out the RESP) with the LIT. The bankrupt may arrange to repurchase the LIT’s interest in the RESP in order to retain its full value.

Shares in a publicly traded company

Shares in a publicly traded company are not an exempt asset and will vest with the LIT. 

Timeshares

The bankrupt’s interest in a timeshare, wherever located in the world, is not an exempt asset and will vest with the LIT.

Bankrupt’s interest in a family trust

The bankrupt’s interest in a family trust is not an exempt asset. However, the LIT is subject to the terms of the family trust which may cause difficulty in their collecting on this asset. 

Motor vehicle

There is an exemption of up to $7,117 for one (1) motor vehicle (e.g. car, truck, motorcycle) in Ontario.

If the bankrupt owns multiple motor vehicles, they would need to arrange with the LIT to pay the fair market value of the additional vehicle to retain them.

For a leased or financed motor vehicle where security has been validly registered against it and there is no equity in the vehicle, the LIT would release its interest back to the lease or finance company.

Principal residence

There is an exemption limit of $10,783 for a principal residence (i.e. home) in Ontario.

The LIT will review certain documents (i.e. land deed, land title registry, current mortgage statement, etc.) and confirm the property value by appraisal or opinion of value to determine any equity available to the Bankruptcy estate.

If the equity exceeds the exemption, the bankrupt must either arrange to repurchase the LIT’s interest in the property or surrender the property and receive the exemption in cash.

If the property is jointly owned (e.g. with a spouse), the bankrupt will only be required to repurchase the equivalent of 50 percent of the equity available in the property.

Life insurance policy

Pursuant to the Insurance Act, a life insurance policy with a designated beneficiary is an exempt asset. However, a life insurance policy payable to the estate of the bankrupt is not, and the cash surrender value of the policy is subject to seizure. 

Some policies include a cash surrender value or investment component and accordingly may be subject to seizure. The LIT will review the policy and confirm the status of the policy with the insurance company.

Claims resulting from personal injury

If the bankrupt is successful in litigating for damages for personal injury (i.e. motor vehicle accident, etc.), the proceeds are an exempt asset.

Lottery winnings

Lottery winnings by an undischarged bankrupt are an asset of the bankruptcy estate. If the winning occurs after the bankrupt’s discharge, the winnings are exempt from seizure. 

Inheritance

Any inheritance received by an undischarged bankrupt is an asset of the bankruptcy estate. If the bankrupt comes into an inheritance after the Bankruptcy has been discharged, the inheritance is not an asset of the Bankruptcy estate. 

Tools of trade

There is an exemption limit of up to $14,405 in Ontario for tools of trade and other personal property used to earn a living.

Income tax refund for the year(s) prior to Bankruptcy

The LIT is required to file the personal income tax return for the year(s) prior to the Bankruptcy and for the year of bankruptcy (for the pre- and post-period) with the Canada Revenue Agency (CRA). Any refunds available are an asset of the bankruptcy estate, subject to set-off by CRA for prior liabilities, amounts owing to family responsibility, restitution orders, etc. CRA will forward the remaining refund(s) to the LIT for the general benefit of the creditors.

Goods and Services Tax Credit (GST)

GST refunds are not an asset of the bankruptcy estate unless such refunds are required to cover the LIT’s prescribed fees and disbursements to a maximum threshold. GST refunds in excess of that threshold must be returned to the bankrupt.

Canada Child Benefit (CCB)

The CCB is an exempt asset. It cannot be assigned to the LIT, charged, attached or given as security.

Disability Tax Credit (DTC)

Any pre and/or post-bankruptcy personal income tax refund resulting from a claim of the DTC is an asset of the bankruptcy estate, subject to set-off by the CRA.

Alternative options to protect assets

For debtors with a significant number of realizable asset or high value assets they prefer to protect, it may be worthwhile to consider filing a Consumer Proposal instead. The LIT will review this option during a Free Confidential Consultation and help the debtor evaluate the pros and cons of each option given their individual circumstances.