Did you know that you will not lose all your assets if you file for Bankruptcy or a Consumer Proposal?
A Bankruptcy or Proposal to creditors gives you protection from your creditors and allows you to make a fresh start. Bankruptcy exemptions are a topic that not many people are familiar with. It is a common misconception that if you choose to file for Bankruptcy, you will lose all of your assets.
This is not the case.
The law protects specific property and assets from the bankruptcy process. These “bankruptcy exemptions” are intended to provide you with reasonable living expenses, support your family, allow you to work, and rebuild your financial position.
If you need help navigating financial difficulty, get in touch with us for a free consultation. No pitch, just real talk to assess your options to get back on track.
What are Bankruptcy Exemptions?
You will be able to keep some of your possessions when you file for Bankruptcy. These assets are called Bankruptcy exemptions because they are exempt from seizure (“protected from creditor collection”).
In a bankruptcy you ‘assign’ or surrender your assets to the trustee in exchange for the discharge of your debts. There are however some exceptions to the assets you must hand over to your trustee. These rules, or bankruptcy exemptions, are designed to allow you to keep certain assets that the government feels are reasonable living expenses. While overall bankruptcy is governed by the Bankruptcy and Insolvency Act (“BIA”), bankruptcy exemptions in Canada are set by provincial legislation.
How much of each asset you can keep in a bankruptcy depends on the province or territory you live but generally the types of assets that are exempt from seizure by your trustee are similar across Canada.
Alberta Bankruptcy Exemptions
Each Province has its own asset exemption allowance. The (“BIA”) is Federal, the Civil Enforcement Act is Provincial.
When you file for Bankruptcy, you will give up some of your assets to your LIT, who will essentially turn these assets into money (known as liquidation) and distribute the money to your creditors to help pay your debts. Bankruptcy exemptions are defined by the law and what you’re entitled to keep will depend on the province you live in.
What Can I Keep When Filing Bankruptcy in Alberta?
These exemptions are based on Civil Enforcement Act of Alberta.
Alberta bankruptcy exemptions refer to the equity in the property you can keep when filing bankruptcy or a proposal. (These exemptions also apply to people who are not in bankruptcy or have not filed a proposal.)
List of Alberta exemptions:
To explain Alberta bankruptcy exemptions consider this scenario – You have a car that is worth $5,000 which has a $3,000 secured lien owed on the car, the car has equity of $2,000. In Alberta the exemption for a car is $5,000 and so in this scenario you are able to keep the $2,000 of equity in the car and if you file a bankrupt, you will be able to keep the equity in the vehicle.
The equity in the debtor’s principal residence, including a mobile home, up to a value of $40,000.00; or if there are more than yourself or spouse on title, your share of portion of interest on title (eg 3 on title, you each have 1/3 interest). If you are on title together with an “ex-spouse”, you are entitled to $20,000.00 exemption if you are living in the property).
Your Trustee will review these calculations based on your personal situation:
- Food required by the debtor and his/her dependants during the next 12 months;
- Necessary clothing of the debtor and his/her dependants up to a value of $4,000;
- Household furniture and appliances up to a value of $4,000;
- One motor vehicle not exceeding a value or equity of $5,000.00;
- Personal property “Tools of Trade” (i.e. tools, equipment, books) required by the debtor to earn income from the debtor’s occupation up to a value of $10,000;
- Registered Retirement Savings Plans RRSPs, Registered Retirement Income Funds (RRIFs), Registered Disability Savings Plans (RDSP), Deferred Profit Sharing Plans (DPSPs) and Registered Education Saving Plans (RESP’s); NOTE: This went into force in Alberta on October 1, 2009.
- Where the debtor is a bona fide farmer and whose principal source of livelihood is farming 160 acres if the debtor’s principal residence is located on that 160 acres and that the 160 acres is part of the debtor’s farm;
- Where the debtor’s primary income is from farming operations, personal property required by the debtor for the proper and efficient conduct of the debtor’s farming operations for the next 12 months;
- All necessary medical and dental aids required by the debtor and his/her dependants;
Exceptions to the Exemptions:
The exempt status does not apply to assets or chattel subject to a Security Agreement (lien against the property), a purchase money security interest (PMSI). A PMSI is when a loan is given to make the purchase of a specific asset, exempt or not. These liens would be valid against that asset until the loan is paid if the lien is properly registered.
Please note that if you also have CRA debt and CRA has placed a Crown Debt Interest on your property, this debt must also be repaid.
The exceptions will including a creditor being able to enforce their security interest on the asset(s) should the security agreement not be paid or arrangements made with that creditor’s security interest.
What are non-exempt assets?
These refer to what you will lose or need pay the value of in a bankruptcy or proposal option.
After you file for bankruptcy, some of your assets may be sold to repay money you owe to your creditors. These assets are called non-exempt property. The concept behind non-exempt property is simple: If you have valuable assets and you file for bankruptcy, the value of these assets should be used to pay off some of the debts that will otherwise be forgiven in your personal bankruptcy.
Value means the equity in these assets, after repaying any secured loans or registered liens. For example, if you own a home worth $500,000 and you have a mortgage of $350,000 you have equity in your home of $150,000. After your exemption interest is considered, the balance will be the equity that will be surrendered.
Common items you may need to surrender to the trustee could include:
- A second vehicle
- Valuable artwork, coin collections, jewelry
- Stocks, bonds and investments not protected in a registered account
- Cash in the bank beyond what is reasonable to pay for living costs for a short period of time
- Equity in your home, subject to specific exemptions
- A second home or vacation property like a cottage
- An inheritance, insurance claim or other kind of settlement
- A tax refund on income up to the date of filing
These are just some of the questions and answers we have for individuals inquiring about the misconception of assets when filing bankruptcy or a consumer proposal.
Are you ready to be relieved from Financial Distress to Financial Success? Give us a call and we would be happy to assist you moving forward. It doesn’t cost you a thing to ask questions, it only takes reaching out to make the call to get answers. We are here to help you with moving forward.