One of the great myths and misunderstandings surrounding personal bankruptcy is that people think that they will lose everything they own. Fortunately this is not true. Bankruptcy is meant to help people get a fresh start. It is not meant to be a punishment. Bankruptcy is meant to help rehabilitate peoples financial situation.
According to the Bankruptcy and Insolvency Act, when an individual files and Assignment in bankruptcy, all non-exempt assets belonging to the bankrupt vest in the trustee. The flip side of that is that individuals going through personal bankruptcy can claim certain assets as exempt from seizure. This means that these exempt assets cannot be seized by the trustee for the benefit of creditors and that the individual is able to keep them.
The Bankruptcy and Insolvency Act contains certain exemptions. These exemptions are federal law and are the same for all Canadians. Beyond those exemptions, there are also exemptions specific to each province based on provincial legislation. In Nova Scotia, the Judicature Act of Nova Scotia, the Personal Property Security Act of Nova Scotia and the Insurance Act of Nova Scotia all contain exempt asset rules.
According to Section 67(1)(b.3) of the Bankruptcy and Insolvency Act, “property in a registered retirement savings plan or a registered retirement income fund, as those expressions are defined in the Income Tax Act or in any prescribed plan, other than property contributed to any such plan or fund in the 12 months before the date of bankruptcy.” This means that RRSP or RRIF contributions made more than 1 year before the date of bankruptcy are exempt from seizure and cannot be seized. There is no limit on the amount that is exempt from seizure.
Pension funds have a specific purpose. They are meant to be an individual’s income when they retire. Section 71 of the Pension Benefits Act provides that benefits accrued by a member in a pension plan are exempt from execution, seizure or attachment. Accordingly, the bankrupt retains locked-in pension funds.
Life Insurance Policies
The first thing to understand is that there are two types life insurance policies. A term life insurance policy is a benefit paid to your beneficiaries upon your death. This type insurance pays out if your death occurs during specific term (length of time). There is no value built into this type of policy thus the trustee has no interest in this type of policy. If you receive payment from a term policy as a beneficiary during your bankruptcy – that is a different matter.
A whole life policy builds cash surrender value. You can borrow against this value or it can add value to the payout upon death. The cash surrender value is an asset in a bankruptcy. However, under the Insurance Act of Nova Scotia if your insurance policy’s beneficiary is your spouse, child, parent, or grandchild then the value of the policy is exempt from seizure and unaffected by making an assignment in bankruptcy.
When someone files a Bankruptcy, the Insolvency Trustee looks at the liquidation value of their furniture and personal effects. The Judicature Act of Nova Scotia allows an individual to retain such assets up to a value of $5000. This limit is sufficient to enable the vast majority of debtors to claim of their household furnishings as exempt from seizure.
If you owe money against your vehicle, the debt is a secured debt. If you want to keep the vehicle, you must continue to pay your loan under the terms and conditions you agreed to. Vehicle exemptions do not apply to vehicles which are collateral on loans.
If you do not owe money against your car, it may be exempt from seizure. In Nova Scotia, vehicles up to a value of $3000.00 are exempt from seizure in a personal bankruptcy. This limit is increased to $6,500 in value if the vehicle is used in the course of employment, is necessary to retain employment, or is required for transportation to a place of employment where no public transportation is reasonably available.
If you have a vehicle over the exemption limit, buying back the equity in the vehicle over the course of your bankruptcy may be an option. For example, if your vehicle is worth $8000 and you are eligible to claim to the $6500 exemption, there is equity of $1500 available for your creditors. The trustee would discuss with the options to deal with this in a manner that allowed you to keep your vehicle.
Medical and Health Aids
These are items that cannot be taken from you if you file for bankruptcy.
Tools of Trade
Farming equipment, fishing nets, tools and implements used in the debtor’s chief occupation not exceeding $7,500.00 (Section of the Judicature Act of Nova Scotia).
Fuel and Food
These items can be retained and there is no dollar limit on the amount.
Grains, Seeds and Livestock
All grains, seeds and livestock reasonably necessary for the domestic use of the debtor and their family can be retained.
The best way to understand the asset exemptions in a personal bankruptcy is to ask a Licensed Insolvency Trustee. We can help you understand the laws that apply to your situation. If you own assets that are unencumbered and not exempt, a trustee can discuss your options for dealing with these assets. Often individuals will opt to file a consumer proposal to avoid bankruptcy if there are significant assets. If you have questions…..ask us….it is the only way you will get concrete answers.