Do I get to keep any assets in bankruptcy in Canada? And is bankruptcy cheap?
Yes, quite a few, actually. And yes, it sure can be cheap.
Canadian insolvency legislation is quite generous, as a matter of fact.
And considering we are talking to many homeowners these days – and expect do so much more in the coming 3-4 years – I thought it timely to discuss exactly what asset exemptions are provided for in the Bankruptcy and Insolvency Act in Canada and how cheap a filing can based on your income.
Let’s take an extreme example.
Scenario (the ‘hook’):
- You owe $1,039,000 in total unsecured debt;
o $240,000 in HST from a business
o $198,000 in personal income tax
o $210,000 in credit card and line of credit debt
o $140,000 in a personally guaranteed biz loan
o $116,000 in a shortfall on the sale of an underwater investment property
o $135,000 lawsuit judgment against you from a former biz partner
On that debt you could file a bankruptcy as follows, if everything falls into place just so:
$250 x 9 months - $2,250 total; full & automatic bankruptcy discharge
Yep.
Here’s the thing: a bankruptcy’s length and cost are not determined by the amount of debt you have (there is a personal income tax matter that is an exemption to this rule but it’s much more rare.) You could owe a million bucks or more – there’s no limit - in unsecured debt and it makes no difference to what your bankruptcy will look like.
Let me expand.
There are 3 factors that determine a bankruptcy:
1. Net monthly income (as a % of household income)
2. Non-exempt assets
3. Prior bankruptcy filings
So how would I only pay $250 x 9 months?
Net monthly incomes are capped in Canadian bankruptcy law based on the number of people in a household. And the amounts are pathetically, archaically low: $2,543 for a single person, $3,165 for 2, $3,891 for 3, $4,725 for 4, etc.
So if you are either making very low income, or are out of work, or are self-employed (where you can sort of make-what-you-make due to the fluctuating and volatile nature of most self-employed people, then you could easily qualify for the above scenario.
But it’s also the bankrupt’s percentage of the household income: if you, the bankrupt, are making NO income during the bankruptcy period, and the household is making decent or even very high income, 0 % of a lot is still a $250 for 9 months bankruptcy.
So what if you’re making decent income? Well, it’s still VERY forgiving, especially if the debts are very high.
Example of a “surplus income” bankruptcy:
Bankrupt’s net monthly income: $4,300
Bankrupt’s net monthly income: $3,400
Total: $7,700
(4-person household)
21-month bankruptcy (they add a year onto the basic 9 months):
- Surplus: (amount over the threshold) $7,700 - $4,725 = $2,975
- Bankrupt’s share = 56%
- = $1,661 (bankrupt’s portion)
- 50% of that = $830.50
- $830.50 x 21 months = $17,440.50
So: you owe $1,039,000 in unsecured debt, yet you only pay $17,440.50 in a bankruptcy filing.
Told ya.
Now, how about assets? (property)
Although insolvency law is federal and there is an entire section of the Act devoted to property (s. 67), property is provincial jurisdiction, so each province has its own exemptions for property (assets) in bankruptcy:
Ontario exemptions:
- Registered plans (RRSPs, RIFFs): fully exempt except last 12 months’ contributions
o you could have a million bucks in an RRSP – as long as you haven’t put any money into it in the last 12 months, it’s exempt
- Car: $7,117
o $7,117 is exempt amount on an owed vehicle; any value above that is non-exempt and subject to seizure/realization in bankruptcy (or you pay to keep that)
o Financed or leased vehicle; if fully encumbered, you could drive a Lamborghini if you can afford the payments – the car belongs to the lender as a secured debt; keep it, drive it, enjoy yourself
o Car(s) in spouse’s name? No problem – it’s/they are not yours.
Tools of trade/professional gear: $14,405
o be a DJ if you like, or a wildlife photographer, or a stone mason – as long as your tools are under that limit, keep ‘em; pay for the amounts above that
Life insurance/pensions: most pensions and life insurance policies are fully exempt
Household goods/furnishings: $14,180 (how do they come up with these weird amounts? Surely it’s a by government committee.) fully exempt from seizure/realization; own a Rembrandt? That’s a problem.
House? $10,783
o Technically, in Ontario the exemption on home equity is $10,783; translation: in Ontario property law, any equity in your home (primary residence only) up to $10,783 is exempt. But if equity is greater, there is no exemption at all and all the equity is subject to seizure/realization by the trustee. Realistically this means there is no equity exemption at all for most people. But hey, the legal optics are good.
o To keep this basic (ignoring the measly exemptions here): if your house (or houses) are in your spouse’s name and were never transferred to them by you (or were transferred more than 5 years ago by you), it/they is/are fully untouchable by a bankruptcy trustee; mansions, cottages, investment properties, etc.
So why am I talking about bankruptcy when I always talk about consumer proposals? The vast majority of consumer insolvency filings in Canada are proposals these days across Canada – and an even higher percentage in our firm – right?
Yes, but the new wave of homeowners calling us and having to file insolvency proceedings means potentially much higher debt totals. And when you have a LOT of debt, a proposal isn’t always a viable option.
Here’s why homeowners are calling us now vs the 12 years prior when we heard from very few (less than 3% on average on the Hoyes Michalos Bankruptcy Homeowners Index https://www.hoyes.com/press/homeowner-bankruptcy-index/ ):
1. Prebuild disasters; bought in the peak (say 2020-22) yet didn’t take possession until the trough (now), appraisal came in way too low for lender to approve the mortgage; lose deposit, maybe get sued by builder
2. Investment property disasters; lots of genius/amateur landlords under severe FOMO getting killed on negative carry and negative equity rental properties + increased mortgage payments
3. Mortgage payment increases on primary res due to interest rate increases
4. General overextension and increasing costs of homeownership combined with greatly increasing credit card debt
(It should be noted that in bankruptcy, any creditor may raise an opposition to somebody’s discharge. Objections could be made on grounds that family members have assets, but this rarely happens because it is costly to do so (lawyers) with little hope that a bankruptcy judge will order a conditional discharge (make the bankrupt pay something) due to the law’s being pretty clear on exemptions. The judge may balk at your ownership of the above-mentioned Lambo, though. A creditor or judge can also ask if a viable proposal could have been filed instead by sale of spousal assets, but the spouse is under no legal obligation to do that, so that would be extremely rare.)
So if your income is low or its percentage of the household monthly income is very low, and you have no non-exempt assets, you can file a bankruptcy for very little in Canada.
In short, a bankruptcy in Canada can be a very lenient, inexpensive proceeding that is quite summary in nature, making it extremely efficient, especially compared to the bankruptcy code in the United States.