What I Wish People Understood About Bankruptcy | Do you lose all of your assets in a bankruptcy?

Why Don't People Always Lose Assets In A Bankruptcy?

There's a common misconception that if someone becomes bankrupt, everything they have gets sold to pay creditors and they're left with nothing. Others are sometimes surprised when they see someone they know to be bankrupt continuing to go about their lives seemingly as usual. There can be a suspicion in these cases that the person is flouting the bankruptcy rules or that the system is somehow “rigged”.

The truth is, people often don't lose their assets in bankruptcy for one or more of the following reasons:

They filed a creditor proposal, not a bankruptcy

Sometimes, the media and others refer to any kind of financial restructuring as “bankruptcy”, which likely stems from the way the word is used in the United States. In Canada, “bankruptcy” is a very specific type of financial restructuring, a last resort. Licensed Insolvency Trustees can often assist people with a less drastic type of financial restructuring, called a Consumer Proposal. This is still a formal legal restructuring, and the laws relating to a Consumer Proposal are contained in the federal Bankruptcy and Insolvency Act, so sometimes people confuse this with bankruptcy. But there are some major differences between a bankruptcy and a Consumer Proposal.

One of the main differences is that individuals who file a Consumer Proposal are not required to turn over any of their assets as part of the process. Instead, they make a new legal agreement with their creditors to make payments into a proposal “fund”, which is then used to pay down some or all of the debt. Sometimes, part of the agreement is that the individual will sell certain assets to generate the money for the “fund”, but it's not a requirement. More often, if the individual has valuable assets that their creditors could have seized, they'll offer to pay the value of those assets into the fund over a period of time, such as monthly payments for five years. In that case, they keep the assets but their creditors still get to benefit from their value.

They don’t own any assets

People don’t often share a lot of information about their finances, especially if they are experiencing financial difficulty. So others might be surprised to find out that the house a person lives in or the car they drive is leased or belongs to a family member or the company they work for. In these cases, they don’t own the assets so there's nothing to turn over to the Trustee if they file a bankruptcy. As long as they can continue to honour their agreement with the owner, they can keep using the assets.

Their assets are fully encumbered by secured debt

Many people don’t realize that when a person files a bankruptcy, the bankruptcy does not deal with secured debt – debt that is owed to a creditor who has taken an asset as security for their debt. A common example of this is a home mortgage. Although the home may be owned by the inhabitant, the bank has registered on the home’s title as a secured creditor. This gives the bank the right to seize the asset and/or sell it to get paid back. Since secured creditors are left out of the bankruptcy system, they can continue to deal with the person by letting them continue making payments, or they can get paid by selling the asset.

People who file bankruptcy are more likely to have fully encumbered assets, meaning there's no value left in the asset after deducting what's owed to the secured creditor. In that case, the asset has no value for the other creditors, so it's left to the individual and the secured creditor to figure out what to do about the debt. Typically, as long as the individual can keep the secured creditor satisfied by continuing to make monthly payments, they can keep the asset.

Their assets are exempt

Each province in Canada has laws that make certain assets exempt from seizure by creditors, which means that the people owed money can’t take those assets or force an individual to sell them in order to get paid. The Trustee in a bankruptcy is subject to those same laws.

The reason for these exemptions is to allow the individual to keep enough to live on while they rebuild their financial lives. Without these exemptions, it would be much harder for bankrupt individuals to rebuild, and they'd be more likely to need to rely on social assistance programs in the aftermath of a bankruptcy filing.

In Alberta, the Civil Enforcement Act governs exempt assets which include:

• Up to $40,000 in equity (sale value minus secured debt) in a primary residence
• Up to $5,000 in value (or equity) in one vehicle
• Certain personal and household goods
• Most RRSP and RESP savings
• Certain tools of the trade for generating income

If the individual’s assets (or the value left after deducting secured debt on those assets) don't exceed the above limits, they likely won’t lose the assets in a bankruptcy.

They've made a deal with the Trustee to “buy it back” 

Sometimes, it's important to the individual to keep assets that they're supposed to hand over to the Trustee. In that case, they can attempt to negotiate with the Trustee to keep the asset, by paying the Trustee for its value. Often, this involves assistance from family and/or payments to the Trustee over time. So even though the person may have previously paid for the item, they essentially pay for it again so that they don’t have to release it to the Trustee.

Find Out What You Can Keep

In each of the above cases, assets that wouldn't have been available to be seized by creditors can be kept by the bankrupt individual in bankruptcy, while assets that would've been available to be seized by creditors are either seized by the Trustee or their value is paid over to the Trustee. So, in essence, bankruptcy doesn't change what can or cannot be kept. It's simply an orderly process for collecting all of the assets that would've otherwise been available and distributing them to creditors fairly.

Too many people delay coming to see a Licensed Insolvency Trustee due to fear over losing their assets. As a result, they often end up spending months, years or even decades struggling with their debt before they reach out for help. I wish people knew it didn’t have to be that way.

If you are struggling with debt and want to explore your options, we can help. Charla Smith & Company is a Calgary-based Licensed Insolvency Trustee, serving the southern Alberta region. We regularly help individuals navigate their options for dealing with overwhelming debt. If you would like a free, no-commitment consultation to review your options, contact us.

Disclaimer: This publication provides general information and should be seen as broad guidance only. The information contained herein cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon this information without obtaining specific professional advice relating to your particular circumstances. Charla Smith & Company Ltd. does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.