What Are Bankruptcy Exemptions?
There is an understanding that despite filing for bankruptcy, you will still need certain belongings in order to work, maintain dignity, and rebuild your financial standing. These assets are protected during bankruptcy as bankruptcy exemptions.
Bankruptcy exemptions are assets that will not be seized by your Licensed Insolvency Trustee during the bankruptcy process. In other words, these are things you own that you get to keep, even after filing for bankruptcy.
The exemptions and amounts are government-regulated and vary slightly from province to province. In Alberta, you can expect to keep:
- Food for the next 12 months (including dependents)
- Necessary clothing up to $4,000 (including dependents)
- Household furnishings and appliances up to $4,000
- One motor vehicle up to $5,000
- Home equity in your principal residence, including a mobile home, up to $40,000 (this is reduced to your percentage of ownership if you are a co-owner)
- For farmers, up to 160 acres of farmland and necessary equipment
- Personal property required to earn a living (books, tools, equipment) up to $10,000
- RRSPs, RESPs, and pensions
- Certain life insurance policiesNo limit on medical and dental aids
Alberta’s Laws & Bankruptcy Exemptions
Your Home
You will be able to keep your home during bankruptcy, assuming the equity does not exceed $40,000. Note that your home’s equity, not its market value, is taken into consideration during the bankruptcy process. This means that if your home is worth $250,000 and you have $220,000 remaining on your mortgage, you will be able to keep your home because your home equity is $30,000.
The $40,000 home equity exemption will be affected if you co-own a home. If you co-own a home, the exemption amount will be reduced by the percent you own. For example, if you have 50% ownership of your home, your exemption amount will be $20,000.
If you are behind on your mortgage payments, your home can be foreclosed on regardless of bankruptcy filings. Keeping your home during bankruptcy is based on the assumption that you can continue to pay scheduled mortgage payments, property taxes, insurance costs and condo fees.
Your Car
In Alberta, you can keep one motor vehicle worth up to $5,000. If you own your car outright, the exemption will apply to the car’s value. If you are paying off a car loan, the exemption will apply to the equity you have accumulated. You could theoretically keep a car worth $10,000 assuming you have paid off less than $5,000 of the loan, making your equity less than $5,000.
Note that if you are behind on car loan payments, your car can be repossessed regardless of bankruptcy. Whether you keep your car is also dependent on whether you can continue to make the scheduled payments of your loan.
Food & Clothing
During bankruptcy, the cost of basic necessities is exempt. Food for you and your family for the next 12 months is exempted. The dollar amount will vary depending on how many dependents you have and will be determined by your Licensed Insolvency Trustee. Clothing up to $4,000 is also exempt. This amount is for you and any dependents you have.
Household Furnishings & Appliances
All household furnishings and appliances are covered up to $4,000. This includes everything from end tables to dishwashers. Any furniture or appliances that exceed this amount will be seized during bankruptcy.
RRSPs, RESPs, Pensions, Life Insurance
Canadian law exempts certain savings and insurance plans during bankruptcy. Depending on the plan, the exemption rules may vary.
For RRSPs (Registered Retirement Savings Plans), amounts contributed within the last 12 months may be seized. All other contributions and transfers are protected and cannot be seized.
RESPs (Registered Education Savings Plans) are a recent exemption in Alberta. The condition of this exemption is that money can only be withdrawn to pay for post-secondary education for the plan’s beneficiary. Otherwise, the money is considered an asset and is not exempt from bankruptcy.
Pension plans are exempt if they are locked-in, registered plans. Your Licensed Insolvency Trustee will not be able to seize this money, including any contributions made in the last year.
Life insurance plans may or may not be exempt depending on the policy. If your policy has cash value, your Licensed Insolvency Trustee will be required to seize it. However, your plan will be protected during bankruptcy if the beneficiaries of the plan are your grandparents, parents, spouse, children, or grandchildren. This also applies to registered retirement plans with a life insurance component.
Secured Debt
Secured debt is any debt you have that is tied to a specific asset and uses that asset as collateral. Anything purchased with a loan or payment plan is likely a secured debt. Your car and your home are two assets that are usually secured debts, but there are specific exemption amounts for these assets. Because secured debts have a tangible asset as collateral, they are typically exempt from bankruptcy.
Although secured debts are exempt from bankruptcy, the asset can still be foreclosed on or seized by your creditor if you fall behind on payments.
Tools of Your Trade
Personal property used to earn a living is exempt from bankruptcy, up to $10,000. This includes books, tools, and equipment required for you to do your job. If you’re a farmer, there is a separate exemption amount for farming equipment.
Dental & Medical Aids/Appliances
All dental and medical aids are exempt during the bankruptcy process. There is no dollar limit on what aids or appliances you can keep. Medical and dental aids for your dependents are also exempt.
Other Important Exemptions
Certain sentimental items are also exempt from bankruptcy, although this varies depending on the item. Our Licensed Insolvency Trustees can help you determine what is included. Pets are included in this category and exempt from bankruptcy.
If you earn your living through farming, there are specific exemption amounts for your land and equipment. Up to 160 acres of land is exempt, assuming your primary residence is on that land. Any personal property required for farming operations for the next 12 months is also exempt.
Keep in mind that even for assets that are exempt, bankruptcy is about only keeping what you truly need in order to deal with the debts you owe.
Our Licensed Insolvency Trustees are ready to help you resolve your debts and navigate bankruptcy proceedings or other applicable debt solutions.
