When an unincorporated business files for bankruptcy, the situation plays out in essentially the same way as a personal bankruptcy. Unlike a corporation in which an owner’s personal assets are typically out of reach from creditors, bankruptcy involving a sole proprietorship or partnership puts an owner’s personal property at risk for seizure and liquidation in order to satisfy outstanding debts. However, exceptions do exist.
Basic principle underlying bankruptcy exemptions
Bankruptcy exists to help honest but unfortunate debtors gain relief from unmanageable debt and to make a fresh start. It does not strip an individual of any and all property. Rather, it allows the bankrupt to retain certain types and amounts of property, thus supporting his or her ability to earn an income.
Exempt property under federal law
Both federal and provincial law sets out categories of property that may not be divided among creditors. In section 67(1) of Canada’s Bankruptcy and Insolvency Act (BIA), the four general categories of exempt property are:
- Property that the bankrupt holds in trust for another person;
- Property exempt under the provincial law where the property is located and the bankrupt resides;
- GST credit payments or any other prescribed payments related to the essential needs of the bankrupt or his/her dependants; and
- RRSPs or RRIFs except any contributions made within the 12 months preceding the date of bankruptcy
Exempt property in British Columbia
Each province has its own list of additional exempt property. In British Columbia, property considered necessary for a bankrupt to regain financial footing includes:
- Furniture, appliances and household items to a maximum value of $4,000;
- One motor vehicle with a maximum value of $5,000, or $2,000 if the bankrupt is behind in making maintenance and support payments under the Family Maintenance Enforcement Act;
- Property and tools of the bankrupt’s trade or occupation, to a maximum value of $10,000;
- Clothing and medical aids of the bankrupt and dependants, to an unlimited value; and
- Equity in a principle residence to a maximum equity of $12,000 if located within Greater Vancouver, and $9,000 elsewhere in the province.
Another lesser-known exemption involves insurance-based annuities in which the designated beneficiary is an immediate family member. Strategies involving RRSP and RRIF contributions may also exist in view of provisions within section 71.3 of the Court order Enforcement Act. Individuals considering filing for bankruptcy do well to consult with an insolvency law professional on all available options and strategies before proceeding.