What are exempt assets in bankruptcy?
Are they reviewed upon the sad death of the bankrupt?
We hope that you and your family are safe,
healthy and secure during this COVID-19 pandemic.
Ira Smith Trustee & Receiver Inc.
is absolutely operational and Ira, in addition to
Brandon Smith is readily available for a telephone consultation or video meeting.
What Are Exempt Assets in Bankruptcy?
Bankruptcy Exemptions How What assets you can keep are determined.
An assignment in bankruptcy does not require you to give up all of your assets.
In bankruptcy law, there are rules for bankruptcy exemptions.
Furthermore, every province/territory has regulations that mandate what assets can
be kept and how much equity can be retained.
Assets of this type are called exempt
assets, assets that you are allowed to keep that are not accessible to your
creditors or exempt assets in a bankruptcy.
There are some that fall under federal law and some that fall under provincial law.
So what are exempt assets in bankruptcy in Ontario?
To answer the question,
we need to look at two statutes, one federal and one provincial.
For federal, we look at the Bankruptcy and Insolvency Act, Canada.
Section 67(1),
of the BIA deals specifically with the bankruptcy exemption issue.
It states what property of the bankrupt
available to creditors does and does not comprise. Property that is not included"
property held in trust by the bankrupt for any third party;
under provincial law, the property that cannot be seized;
payments to the bankrupt paid under a program that I will describe as social
assistance provided by the federal or provincial government;
Retirement Savings Plans, In bankruptcy, RRSP, or RRIF,
except for contributions made in the twelve months before the bankruptcy.
When we discuss the property
of a bankrupt, we are referring to the bankrupt's equity in those assets.
Ontario Bankruptcy Exemptions Assets You
Can Keep. As indicated above, one of the asset exemptions in bankruptcy
is any property that cannot be seized under provincial law.
So what are exempt assets in bankruptcy in Ontario that cannot be seized?
For that, we need to go to the Ontario Execution Act. In Ontario
the prescribed amounts for exemptions are: household furnishings and household
appliances $14,180, tools and other personal property used to generate income:
exemptions for farmers being a debtor
engaged exclusively in cultivating the soil or farming
and therefore it is that farmer's principal
source of primary income $31,379 for livestock, fowl, bees, books,
tools and implements; and other chattels ordinarily used by the debtor $14,405
for any other case, $7,117 for a motor vehicle, $10,783 for a principal residence.
As I have written before, there is an exemption in Ontario
for equity in one's home of not more than $10,783.
It is not an exemption for the first
$10,000, but rather if the total equity is below that amount.
Therefore, we can consider the equity in a bankrupt person's ownership interest
in their home to belong to the bankruptcy trustee for all practical purposes.
So this seems pretty straightforward.
But what if a bankrupt person dies before
the end of the bankruptcy proceedings and the bankruptcy estate administration?
A recent decision
from the Alberta Bankruptcy Court, which for reasons I will explain I believe
would be instructive for Ontario, answers that question.
What are exempt assets in bankruptcy, even in death?
In addition to the above statutory exemptions?
Since we are always dealing with the bankrupt's equity in assets,
there is another class of assets that form exempt property in a bankruptcy.
If any of the bankrupt's assets are pledged
as security to the point where the amount owing to the secured creditor
on the secured debt is the same or more than the value of the asset,
then a bankruptcy trustee will not attempt to seize it.
So what may have started out as nonexempt
property can become property that will not be seized.
Two obvious examples are,
one of the motor vehicles owned by a person worth more than $7,117
that is heavily financed, or a principal residence that has
mortgages against it that essentially soaks up all the value.
Another type of asset that may be exempt, life insurance policies.
If the beneficiary under the policy listed
is the spouse, child, parent, or grandparent of the deceased
then the funds flow directly to the beneficiary and avoid probate.
The bankruptcy of the deceased does not change that.
Although not an asset per se and only
available while the person is living are wages, salary from employment.
A bankrupt person is allowed to keep all of their income.
However, all trustees are required to perform an evaluation to see if
the bankrupt must contribute by making surplus income payments.
The concept of bankruptcy surplus income
has been the subject of certain of my prior Brandon Blogs.
Now what are exempt assets in bankruptcy
if the bankrupt person dies before receiving a bankruptcy discharge? On August
3, 2021, the Court of Queen's Bench of Alberta Registrar
in Bankruptcy LR Burkett released reasons for decision in Perry 2021, A 609.
In this case, the trustee sought advice
and directions with respect to whether the principal residence exemption
continues or is no longer available on the death of the bankrupt.
Keep in mind that the principal residence
exemption is much different in Alberta than Ontario.
In Alberta, under the Civil Enforcement Act
and Albertan can claim a principal residence exemption up to $40,000.
However, the fact that the issue was over
equity in a principal residence is somewhat irrelevant.
The real issue is exempt assets
in general, so I would frame it as whether any asset exemption continues or is no
longer available upon the death of the bankrupt, Mr and Mrs Perry each
filed an assignment in bankruptcy on December 19 2012.
and both remain
undischarged bankrupts. At the date of bankruptcy
the bankrupt husband was the only
registered owner of the couple's principal residence.
The bankrupt husband died on January 28 2018.
He did not have any dependents at the time
of his death. The bankrupt wife is the only beneficiary under his Will.
The widowed bankrupt wife moved from the home and the trustee sold it.
As a first observation, this is a perfect example of why
a bankrupt should not allow the bankruptcy proceedings to drag on.
Future events are impossible to predict.
Winning a lottery or acquiring an inheritance are the two best reasons
to avoid letting the bankruptcy process linger for a very long time.
If such a windfall occurs,
the bankruptcy trustee administering the bankruptcy estate can claim it.
Types of Assets Commonly Exempt
from Bankruptcy Across Canada: the Registrar's analysis. The question is,
does the personal exemption of an UN discharge bankrupt remain after his death?
In Alberta, the applicable laws under
which property is exempt from execution or seizure are set out
in the Civil Enforcement Act and the Civil Enforcement Regulation.
The combined effect of S 88 CEA and S 37 (1)
CER allows an enforcement debtor to claim up to $40,000 of the equity in the debtor's
principal residence is being exempt from execution or seizure.
The Registrar noted that the personal exemption is personal to the individual.
In this case, the deceased bankrupt husband.
Section 92 (1) of the CEA specifically
provides that where the enforcement debtor is deceased, the property of the debtor
that would be exempt if the debtor were alive, remains exempt from proceedings
against the debtor's estate for the period of time that the property is required
for the maintenance and support of the deceased debtor's dependants.
This allows the dependants of a deceased
enforcement debtor the opportunity to access up to $40,000 of exempt equity
in the debtor's principal residence for their needs.
In this case, the widowed bankrupt wife
moved out of the house and the trustee sold it.
The exempt equity was no longer necessary for her needs.
Therefore, the Registrar decided
that the deceased bankrupt husband's exemption was lost on his death.
Since the exempt equity was not required
to support the bankrupt wife's needs, the trustee of the dead bankrupt husband
can keep the $40,000 amount is property not covered by the provincial exemption,
and it is available for the benefit of creditors through the bankruptcy debtor
unsecured creditors There is a strong argument that if the personal exemption
resulted in the bankrupt wife being entitled to her deceased husband's
exemption amount, it would not have been paid to her anway.
Rather, it would have been property available to her trustee for her unsecured
creditors and possibly even a dividend to creditors.
What are exempt assets in bankruptcy and what would happen in Ontario?
What would happen in Ontario with exempt assets up to their prescribed maximum
exempt amount under s.5(1) of the Execution Act?
If an execution debtor dies before the seizure and sale of his or her
personal property, then would ever personal property
the deceased
already elected for exemption before death, remains valid after death and may
not be changed by an executor, administrator, or heir of the debtor.
S.5(2) of the Execution Act says that if
no such election was made prior to death, then in this order, a surviving spouse,
a dependent, or a family member has the right to make such an election.
S 5(3) of the Execution Act states
the total quantity and total value of personal property of an execution
debtor that may be claimed as exempt by a person mentioned in subsection two
and by the execution debtor before death must not exceed the quantity and value
of property that would have been exempt property to just the execution debtor.
The wording of Sections five, one and two of the Execution Act is very
different from that of the relevant Alberta legislation referenced above.
So in my view,
it appears that the personal exemption in Ontario would survive and not
constitute property available for the trustee to realize upon,
but this is only up to the exemption limit of each class of exempt asset.
However, under a bankruptcy process,
along with the bankruptcy protection from unsecured creditors,
the bankrupt actually hands over all property to the trustee.
The trustee either overtly or it is
implied hands back to the bankruptcy debtor or any property that is exempt
from seizure, either from a provincial statute or because it is a fully
encumbered asset because of it being pledged for a secured loan.
And there is no equity in Ontario.
Since the Execution Act allows
for selecting exempt assets after death for the benefit of the deceased estate,
it does not appear to me that bankruptcy would change things.
For the reasons I have stated,
the provincial exemptions up to their maximum limits would continue to protect
certain property from seizure in bankruptcy.
What are Exempt assets in Bankruptcy?
Summary I hope that you found this, what are exempt assets in Bankruptcy?
Brandon blog helpful in describing
the personal exemptions in Ontario and whether bankruptcy and death can
change that problems will arise when you are cash starved and in debt.
There are several insolvency processes
available to a person or company with too much debt.
If you are concerned because you or your business are dealing with substantial debt
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Call us now for a no cost consultation.
We hope that you and your family are safe,
healthy, and secure during this COVID-19 pandemic.
Cra.
Smith, Trustee and Receiver Inc is absolutely operational in CRA.
In addition to Brandon Smith is readily
available for a telephone consultation or video meeting.