Transferring Assets Before Bankruptcy: Why You Should Consult a Trustee

If you’re struggling with your finances and heading toward bankruptcy, you may think it makes sense to sell or transfer some of your assets. But transferring assets before filing a bankruptcy can have serious consequences.

The best thing you can do before transferring any of your assets is to connect with a Licensed Insolvency Trustee (LIT) who will help you understand the implications. Asset transfers up to five years prior to you filing a bankruptcy can still have consequences for you and the recipient of the transfers.

Let’s take a look at different kinds of assets and what might happen to them if you file bankruptcy.

When you file a bankruptcy, you surrender your assets

As your Licensed Insolvency Trustee guides you through this challenging financial time in your life, they will explore the nature of your assets. First, you and your trustee will put together a full list of your assets including any property, investments, vehicles, and personal possessions you own. Some of these assets may be exempt in bankruptcy, meaning that you get to keep them, and your creditors have no claim to them. Other assets may not enjoy an exemption, and these kinds of assets may have to be sold to pay your creditors. In some cases, you may be allowed to buy assets back from the bankruptcy, at a fair-market-value price.

Exempt assets

The good news is you don’t have to give up everything you own if you file bankruptcy. Although bankruptcy law applies throughout Canada, the federal government allows each province to set asset exemption amounts. Your Licensed Insolvency Trustee will help you identify assets that are exempt from seizure in your province. In some cases, an asset may only be partially exempt, based on the exemption threshold and the asset’s value. Examples of assets that may have an exemption include:

• Your Principal Residence — Some provinces allow an exemption on principal residence equity. Generally speaking, if your mortgage plus the exemption amount exceeds the fair-market-value of your home, you do not lose your house in bankruptcy.
• Household Furnishings and Contents – Each province sets an exemption amount on the ‘as-is’ value of household furnishings and contents. 
• Personal property — Necessary clothing and personal effects are often exempt up to certain ‘as-is’ values.
• Vehicles — Most provinces have a vehicle exemption amount to help ensure that people who file a bankruptcy can still get to work and run family errands.
• RRSPs and Pension Plans — There is a full exemption on these assets under the federal Bankruptcy and Insolvency Act (BIA), with an exception in some cases of contributions made within 12 months of filing a bankruptcy. 
• Life Insurance – Life insurance plans which have a present-day cash value may be exempt, although that may depend on whom the named beneficiaries are – which is set by provincial law.
• Tools of Trade and Farming Equipment — It is recognized that for self-employed people to make a living, they will need to retain their tools and equipment. As such, there are exemption amounts set for these kinds of assets.

Given what we have discussed above, one reason it’s a bad idea to sell or transfer assets before filing a bankruptcy is that you might actually get to keep those assets anyway, if they’re exempt from seizure.

Encumbered Assets

An encumbered asset is an asset that you got a loan to buy, and on which the lender holds a security interest, such as a lien, until you pay the loan off. If you don’t make the loan payments, the secured lender has the right to take the asset and sell it to recover what they are owed on the loan. Generally speaking, the secured lender also stands ahead of the Licensed Insolvency Trustee with respect to that asset.

A common example of this is a car loan. You borrow money to buy a car, and the lender registers a lien against the car until you pay it off. A Bankruptcy does not affect this kind of loan. As long as you can maintain the payments to the secured lender as agreed, the lender is happy to let you keep the car. A Licensed Insolvency Trustee is only concerned with whether there would be any money available for your other creditors if the vehicle was sold, the secured creditor was paid in full, and any exemptions were taken into account. If the amount that you owe on a car loan is equal to or greater than the amount the car is worth, then there would be nothing to distribute to other creditors in your Bankruptcy. For that reason, you would be allowed to keep the vehicle.

Three more reasons not to sell or transfer assets before filing a bankruptcy

1. It might be considered fraudulent

Transferring what you own to third party within five years of filing a bankruptcy might be appropriate if you receive full market value in return — but if not, it could be considered an attempt to defraud creditors to whom you owe money. Transferring assets without receiving sufficient compensation at a time when you could not pay all of your creditors is known as a fraudulent conveyance. During your bankruptcy, these transfers can actually be reversed, and the assets seized from the person who received them.

2. Your discharge (release) from bankruptcy might be refused or made conditional on repayment

If asset transfers you made are deemed fraudulent, it can affect getting a discharge from your bankruptcy. A discharge is the end of your bankruptcy’s legal proceedings - when you have fulfilled all your duties and you’re released from the obligation to repay your debts. If you have made fraudulent transfers, it may prolong this discharge period until the transfers are reversed and the creditors are rightly compensated. This may include you being ordered by the bankruptcy court to pay amounts that the Licensed Insolvency Trustee was unable to recover. Ultimately, it just leaves you in the bankruptcy process longer than necessary, preventing you from moving on to a debt-free life.

3. Criminal consequences

This is obviously the worst outcome of all. Depending on the extent of your attempts to transfer assets and defraud your creditors, you may be fined or caught up in further legal action. Whether you intended to defraud your creditors or not may not matter. That’s why it is so important to connect with a Licensed Insolvency Trustee if you are experiencing financial hardship to understand the implications of choices you may be considering.

When in doubt consult your trustee

When it comes to debt, it’s always a good idea to talk to an advisor before making any big decisions. If you are going to file a bankruptcy, your trustee will review any assets you may have sold or transferred and advise you on how best to proceed. For example, if you sold some assets to pay for something like rent or food then it shouldn’t be a problem as long as you can explain the sale and support it with documentation. But if you have made transfers that could prove to be problematic, your trustee will help you navigate how to best handle that situation before filing for Bankruptcy.

The best approach is to simply be honest and transparent with your Licensed Insolvency Trustee and they will help guide you through this difficult time. Fortunately, a debt-free life is waiting for you on the other side of the journey.