Contrary to what most people believe, you will not lose everything if you file for bankruptcy.
However, it’s important to understand exemptions to the bankruptcy law as they vary between provinces and territories.
In particular, you are probably concerned about whether or not you will lose your home.
Here at Frederick & Company Ltd., we are dedicated to helping you address your financial hardships so you can move forward with your life.
We also understand your concerns, which is why we want to provide you with the information to answer the question:
“Will I lose my home if I file for bankruptcy?”
Let’s get started!
How Does Bankruptcy Work?
Before we look into debt exemptions, let’s talk about how bankruptcy in Alberta works. Bankruptcy is just one of many solutions to get out of financial trouble and looking into how bankruptcy could impact you will allow you to be informed about all your options so you can make an informed decision about which option is best for you.
Bankruptcy is a debt relief option that allows those who cannot pay their debts to have their debts eliminated but mostly importantly bankruptcy is a process that allows you to rebalance your obligations with your creditors. When you can pay the full debt obligation and of course paying nothing is not fair, bankruptcy provides a process for rebalancing that obligation to be within your ability to pay. Instead of asking “How much do you owe?” bankruptcy considers “How much can you pay?” because bankruptcy is usually based on your ability to pay as determined by your income and your non-exempt assets.
When you file for bankruptcy, you receive legal protection for your exempt – think “necessary” – assets while the remaining “not necessary” assets are not protected from your creditors and therefore the value – not necessarily the asset itself, just the value – of those assets needs to come into the bankruptcy estate.
For example, you need the shirt on your back or your bed to sleep in thus your personal effects and household furnishings are exempt and protected from your creditors. If you had a holiday trailer that is not a necessary asset and as a result, the equity in that asset would need to come into the bankruptcy estate. If that holiday trailer was secured by a loan that was used to purchase it then there may not be any equity in that trailer, and in that case, there would not be a non-exempt value that would have to come into the bankrupt estate.
How the value of the non-exempt assets come into the bankrupt estate is usually a matter of discussion with your Trustee. If you are agreeable to selling the asset or if you want to keep the asset, either way works to pay the value of the asset is paid into the bankrupt estate.
Once you have paid the value of the asset into the estate it is important to ask your trustee to release that asset to you.
Your income, how many people are in your household, and the term of your bankruptcy (which is based on if you have filed a bankruptcy before) are all factors that impact the income payment you will need to pay into the estate. This “surplus income” calculation is used to determine if you can chip in more funds into your bankruptcy.
Let’s consider an example: for a household of one person the 2022 surplus income guideline requires that if you make more than $2,355 you should chip in additional funds into the bankrupt estate. This creates a slide scale where the more you make above the $2,355 guideline the more you chip in towards the rebalancing of your creditors but likewise but if you don’t earn $2,355 then you wouldn’t have to make an additional payment for surplus income. So if you’re earning $6,000 you would have to chip in more – because you have a greater ability to do so – than someone who earns $4,000.00.
Again, the idea around this calculation is to create a fair rebalancing between you and your creditors where you are asked to chip in extra to the degree that you have extra funds available. But, if you do not have the ability to chip in extra then that is taken into consideration as well.
Your Duties in a Bankruptcy
As a bankrupt, you have obligations and duties to assist in the administration of the bankruptcy. You are required to complete the following:
- disclose all your assets to the Trustee including any assets sold in the period prior to your bankruptcy;
- submit income and expenses statements – that detail all income earned and tracks where you spend your money – each month of the bankruptcy (this is what we use to determine your averaged income that the surplus income calculation is based on)
- attend two mandatory financial information sessions,
- make the monthly payments for the non-exempt assets you wish to retain and the surplus income payment determined by your average income,
- provide us with the information necessary to complete your income tax returns, and,
- provide other information requested by the Trustee and attend meetings of creditors as necessary.
What is Exempt From Bankruptcy in Alberta?
In the province of Alberta, debt exemptions are outlined in the Civil Enforcement Act and apply to the equity you have in an asset. These exemptions exist for all Albertans and clearly outline for creditors which assets cannot be seized for the repayment of outstanding debts – anything not on this list would not be protected and therefore non-exempt. These exemptions are honoured by the bankruptcy process and inform the bankruptcy process when determining the value of which assets have to be paid into the bankrupt estate.
Here is a list of bankruptcy exemptions in Alberta:
- Enough food for you and your dependents for the next 12 months.
- Clothing for you and your dependents up to $4,000.
- Household furnishings and appliances up to $4,000.
- One vehicle up to $5,000.
- Tools related to your trade up to $10,000.
- Certain benefits and pensions (social allowance, handicap benefit, widow’s pension)
- RRSPs, RESPs, and pensions
- Life insurance policies with these specific beneficiaries: your spouse, your kids or your parents.
- Medical and dental aids
- Your principal residence (the house you are living in) up to $40,000
Unsecured creditors cannot just seize your assets willy-nilly. Unsecured creditors must go through the legal process to sue you, get a judgment against you, and then a writ of enforcement which then could be placed on your non-exempt assets which would then allow them to seize your assets.
Canada Revenue Agency follows a different process but they can allow issuing a writ against your non-exempt property. This writ is treated differently which will discuss in a follow-up blog.
Is My House Exempt from a Bankruptcy?
If you live in a house you own you are entitled to an exemption for that house up to $40,000 of equity. If you own a property and you are not living there then you would not be entitled to an exemption.
If your home is worth $250,000 and you owe $200,000 on your mortgage, you have $50,000 worth of equity in your home. If you are living in this home you would have a $40,000 exemption which means only $10,000 would be considered non-exempt. If you do not live in this home the non-exempt equity would total $50,000.
If you have non-exempt equity in the house and you have filed for bankruptcy just like with other assets you can opt to sell the house and have the non-exempt equity paid into the bankrupt estate. In this case, you would receive the exemption first – if you are entitled to it as noted above – and the remaining non-exempt equity would be paid into the estate.
Alternatively, you could opt to keep the house and contribute monthly payments into the estate for the value of the non-exempt equity. Either way the creditors will receive the value of the non-exempt equity into the bankrupt estate. You will not be eligible to complete the bankruptcy until this payment is received in full so it will be important to consider how long this might extend your bankruptcy when making this decision.
If you find yourself in this situation, you should have a discussion with your Trustee to determine the pros and cons of each option to help determine which option is better for you.
It is important to note that the period for valuing a house is when the Trustee deals with the property since real estate values are always in flux, and consequently the amount you owe could change as well.
How to File for Bankruptcy in Alberta
The first step in filing for bankruptcy in Alberta is to speak with a Licensed Insolvency Trustee. The Trustee will help you understand your debt situation, your various options to help get through it, and how Canada’s debt regulations and various legislation impact your financial situation.
They should walk you through what paying down your debt on your own looks like, and discuss various options to restructure your budget or refinance your debt through secured refinancing or consolidation loans. They should also discuss in detail informal settlements, the process of filing for bankruptcy, consumer proposal, and orderly payment of debts if you are in Alberta.
The LIT should help you understand every option you have, the pros and cons of each, so that you can make an informed decision about which option is best for you. If you are being told which option is best for you or if all options are not discussed in detail to allow you to become educated, informed, and empowered to make an educated choice yourself we would recommend seeking out another professional who will help you make that informed choice. This is your life, your consequences, and therefore this is most certainly your decision to make.
If, after reviewing your options, you determine that bankruptcy is the best route to take, you will need to provide your personal information, a detailed overview of your income, a list of your creditors and the amounts you owe, and a list of your assets.
The Trustee will prepare the paperwork and meet to discuss again further details surrounding the bankruptcy process and once these documents are e-filed to the government – similar to a tax return – your bankruptcy is official.
There are various duties you will have during a bankruptcy, such as submitting monthly income and expense statements and attending counselling sessions, among others, and a Trustee will detail these for you if you move forward with a bankruptcy.
Can I Settle My Debts and Keep My Home?
Absolutely! Bankruptcy is not the only solution when it comes to settling your debts in Alberta.
An experienced Trustee can help find the best solution for your unique situation. We at Frederick & Company are focused on empowering and educating you on all options available to you so that you can make an informed decision as to how to best move forward.
Bankruptcy is often a last resort, but there are potential alternatives that will help you settle your debts and keep your home.
For example, if you are eligible, you can look into a consumer proposal to keep your home and tackle your debts.
Our Licensed Insolvency Trustees Are Here to Help!
Frederick & Company Ltd. is an approved LIT firm that can help you address your debts and protect your assets.
We are also here to determine if bankruptcy is the right solution for you!
If you are ready to eliminate your financial distress, contact us today.