Bankruptcy vs Consumer Proposal: Protecting Your Assets

This is our second article in our series comparing bankruptcy and proposals discussing some of the differences between bankruptcies and proposals. While both proceedings offer you protection from your creditors under the Bankruptcy and Insolvency Act there are some key differences.

One significant difference between a bankruptcy and a proposal is what happens to your assets in the process. In a bankruptcy you are required to vest assets with the Trustee, while in a proposal you are not.  But what does that really mean and how does it impact you?

Bankruptcy

• You are required to surrender assets (with some exceptions) with the Trustee

Proposal

• You are not required to automatically surrender assets.
• You can choose to surrender certain assets.

When you file for bankruptcy, you make an “assignment in bankruptcy” which involves assigning all your assets to the Trustee to be divided between your creditors.  Some of these assets are exempt, meaning your creditors cannot take them – nor can the Trustee.  An example of an exempt asset is household furnishings.

Some assets are non-exempt, which means either the value of those assets must be contributed to the estate or those assets must be sold.  An example of a non-exempt asset would be an ATV.

There is a limit to the value of the exemption for each type of asset and, as a result, an asset can be exempt but still have a partially non-exempt amount that would need to be collected by the estate. To clarify, here are some examples that discuss vehicles, which are exempt up to the value of $5,000:

• A vehicle worth $4,000 that is free and clear (there are no outstanding debts tied to the car) is exempt.
•  A vehicle worth $7,000 that is free and clear is exempt up to $5,000, and the remaining $2,000 would need to be paid into the estate.
• A vehicle worth $17,000, with a secured loan of $4,000, has an available equity of $13,000 — $5,000 of which would be exempt, with the balance being non-exempt.

The Trustee is responsible for collecting on non-exempt assets, pooling that money together with other realizations — such as surplus income — and ultimately dividing it appropriately amongst the creditors.

The minimum duration of a bankruptcy can range from 9 months to 36 months, and it is important to know that any assets you acquire during that time will vest with the Trustee . That means if you win the lottery or get an inheritance, the value of those non-exempt assets go into the pool of money for your creditors. If your bankruptcy is extended beyond the minimum term then your assets will continue to vest with the Trustee until you are discharged.

In a proposal, the trustee will complete the same assessment of your financial situation as they would in a bankruptcy, taking stock of all exempt and non-exempt assets. They will then determine the total estimated realizations that would be available to creditors in a bankruptcy and suggest a proposal amount that exceeds that.

You can choose to surrender some assets to the trustee, as part of your proposal contributions, but it is not a requirement.  Generally the proposal simply sets up a new payment schedule that offers your creditors more than they would get in a bankruptcy. For the term of the proposal, any and all assets you currently own, or new ones you acquire, are yours to deal with as you see fit.

For contemplating selling your assets outside of a bankruptcy or proposal there is some good food for thought here.

If you would like maintaining control of all assets – current and future – think about a proposal when you are weighing your options. Feel free to call us to chat over a coffee – figuring our your next step is just a phone call away.

Rebecca Frederick, CIRP, Trustee in Bankruptcy
(587)400-3344