What you can keep when filing for bankruptcy.

Bankruptcy provides an individual, who is overwhelmed with debt, the opportunity for a fresh financial start.   As part of the process, the individual is left with enough possessions to maintain their dignity and to assist them towards a fresh start.  The property exempt from seizure is set by the provinces, the territories and the Bankruptcy and Insolvency Act.

 

Bankruptcy exemptions refer to the equity in the property that is exempt from seizure in a bankruptcy.  (For example, if you have a vehicle worth $20,000 and there is a $15,000 secured loan against it, the equity in the vehicle would be $5,000).

The exemptions in British Columbia are as follows:

  • Equity in your principal residence in Greater Vancouver and Victoria up to a value of $12,000.  In the rest of the province up to a value of $9,000;
  • Equity in household items up to a value of $4,000;
  • Equity in a vehicle up to a value of $5,000.  The vehicle exemption drops to $2,000 if the person is behind on child care payments (to facilitate the enforcement of Maintenance Orders);
  • Equity in tools of the trade up to a value of $10,000;
  • Exemptions are in effect for all registered retirement savings plans (RRSP’s, RRIF’s and DPSP’s).  Contributions made in the 12 months prior to the date of bankruptcy will be recovered (clawed back) for the benefit of the bankruptcy estate.  RESP’s are not exempt.
  • Equity in essential clothing and medical aids is unlimited.

What happens if a family member dies – Can you inherit debt?

Typically when someone dies, their personal debt does not get passed on to surviving family members.  Their debt belongs to them and them alone; it is not passed on to their family members when they die.

Normally, the person would have made a will in which an Executor would be appointed.  The Executor is the person responsible to manage the affairs of their estate.  If a person dies without a will, a Court will appoint an administrator to manage the estate.

The basic role of the Executor to identify, value and liquidate of the estates of the deceased person, pay off their debts and distribute the remaining funds to the beneficiaries.  The Executor must pay all the debts in full before he/she can distribute the funds or assets to the beneficiaries; otherwise, he/she may be held personally liable to the creditors of the deceased person.  If there are not enough assets in an estate to cover its debts, the beneficiaries of the estate will not receive anything.  Beneficiaries could be sued if they have received an inheritance before creditors are paid.

If someone has more debts than assets when they die, those debts do not have to be paid by anyone else as a result of the person’s death.  In most cases, the only instance in which another family member would be responsible for their debt is if they co-signed a loan with the deceased person.  By co-signing, both parties assume full responsibility for the loan. If one person cannot pay (for a number of reasons including, but not limited to, death), the other person carries the remainder of the debt alone.

In this circumstance, where the debt exceeds the value of the assets, the Executor may want to assign the estate into bankruptcy, so that the assets can be distributed in the appropriate manner without attracting any personal liability to the executor.

There are some assets that can flow to a beneficiary even if the deceased person has more debts than assets.  These are assets would not become a part of the estate of the deceased, such as life insurance policies with a designated beneficiary, real property that is registered a joint tenancy and property held in a trust for someone else.

Before any debts are paid out, including credit card debt, or any assets are distributed to beneficiaries of the estate, it is recommended that one should seek legal advice first.

Consumer proposals – There is life after debt!

Given the current economic conditions, more people are turning to consumer proposals to settle their debts, rather than filing outright bankruptcy.  As one of the leading Bankruptcy Trustees on Vancouver Island, we have helped many people through the consumer proposal process and onto better lives.

What is a Proposal?

A consumer proposal is legal process provided by the Bankruptcy and Insolvency Act for anyone with over $5,000 but less than $250,000 in unsecured debt, or $500,000 per couple (excluding their primary residence mortgage).  Unsecured debt might include credit cards, lines of credit, loans and unpaid income tax.  The consumer proposal is an agreement to repay a portion of the unsecured debts through the services of a Trustee in Bankruptcy. The proposal terms are normally structured over 5 years with one monthly payment.  While the amount of debt being repaid is usually substantially less than the actual amount owed, it is normally more than the creditors would get if the person went into Bankruptcy.

The consumer proposal is voted on by all the creditors involved, if the majority accepts, it is binding for all creditors.  Once a proposal is accepted by the creditors, all interest is frozen and all unsecured debt collection efforts, including calls, letters, wage garnishments, and legal actions will stop.

During the process, a person can miss two payments, which would then be added on to the end. If a third payment is missed during this process, the proposal would be annulled and the creditors rights would be revived to purse the person for collections of their account, including the interest since the time the proposal was filed.

The main benefits of filing a consumer proposal over bankruptcy are as follows:

  • allows a person to keep their assets including a home and investments like an RESP (note: secured loans on assets must be paid in order to retain those assets);
  • the person works in a profession that does not allow bankruptcy;
  • the stigma of bankruptcy is totally unacceptable to the person;
  • bankruptcy may prohibit sponsorship of a family member for immigration purposes;
  • going into bankruptcy may force a spouse into bankruptcy;
  • repay less than they owe and make the monthly payment manageable, yet still receive the same creditor protection they would receive in a bankruptcy;
  • make their payments over a period of up to 5 years, with the flexibility to pay their balance off earlier; and
  • actually make lower monthly payments than they would in a bankruptcy if they have a higher than average income.

Contact us today.  We will assess your financial situation to review all your financial options.  If it’s determined that a consumer proposal is the best choice for your situation, we will prepare all the necessary paper work and table your offer to the creditors.  While this arrangement may not work for everyone’s financial situation, a consumer proposal may be the best way to provide you a financial fresh start.

Is my retirement plan/pension safe if I file for Bankruptcy?

The vast majority of Canadians who file for bankruptcy are honest but unfortunate debtors who will go to great lengths to pay off their debts.  Some of these people have cashed in their RRSPs in a desperate, futile attempt to pay off their creditors. By the time they file for bankruptcy, their RRSPs are gone – leaving them no savings for their retirement years.

Under the Bankruptcy and Insolvency Act, a trustee is appointed to administer a person’s file.  When a person files for bankruptcy, they assign over their assets to the trustee.  One of the trustee’s duties is to take the assets, convert them into cash, and distribute them amongst your creditors.  Under the Act, the government of Canada supports a person’s right to hold on to their RRSPs, even in a bankruptcy.

The Act provides that a person, who files for bankruptcy, can retain the following

  • All Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFS) are exempt from seizure in bankruptcy, except for contributions made in the 12-month period leading up to the bankruptcy
  • An RRSP that is locked-in as a result of a previous employment. The most common example of a locked-in RRSP is an employee who works for a company with a pension plan. The employee leaves the company before retirement, so the employee’s accumulated pension entitlement is converted to a locked-in RRSP.
  • RRSP’s that have a life insurance element are usually exempt in a bankruptcy.

To discuss your RRSP investments and bankruptcy, make an appointment today.  We offer a free initial consultation to explore options for a financial fresh start.