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As you are probably aware, bankruptcy will often cost you almost everything that you own, barring a couple of exceptions, depending on where you live and your unique life situation.

During the bankruptcy process in Canada, your Licensed Insolvency Trustee will need to take possession of all your non-exempt assets. They’ll then need to sell them for what they’re worth and give the proceeds to your creditors to cover some (or all) of the debt that you owe to them.

What Is Considered A Non-Exempt Asset During Bankruptcy?

Included in this are any assets that are owned as of the date you filed for bankruptcy, as well as any assets that you may have received after the fact. While the first part of that sentence is simple enough, the second part can be a little bit confusing. Essentially, this refers to gifts, lottery winnings, inheritance, and any other kind of unexpected financial gain you may experience.

As a result, you need to tell your insolvency trustee about any sort of surprise profit that you receive (or expect to receive) while you are in the process of bankruptcy. These are technically called “after-acquired property”. This is different from say, a work bonus or retroactive government benefits, which will classify as earned income and will be subject to surplus income rules. Those earned incomes usually won’t be taken, at least not in full.

How Are Gifts Treated During Bankruptcy?

There are no official rules when it comes to reporting gifts you received during your bankruptcy. If we are getting technical, they can seize any valuable gift you are given. However, the chances of them coming and taking the few dollars you got from your mother-in-law are slim to none. Then again, if you were given a few thousand dollars as a gift, there is a very good chance that they will take it from you.

The same thing goes for any physical gifts that you are given (objects, etc.). If you are given something small or relatively necessary, it will often be covered by your exemption for necessary items. But if you are given something large and valuable that is more than your personal exemption, you might have to give it to your trustee so they can sell it for excess cash to pay your creditors.

How Is Inheritance Treated During Bankruptcy?

If someone you love has left you a sizable amount of money or a valuable asset after they’ve passed, is it yours to keep even if you’re filing for bankruptcy? Or is that asset vulnerable because of your filing?

It may be possible for you to keep your inheritance after you’ve been discharged from bankruptcy, but this isn’t always the case. Your ability to hold onto your inheritance ultimately depends on the date that the individual who left the inheritance died.

Here are a couple of scenarios that could play out, based on the date of the person’s passing:

Getting An Inheritance Before You File For Bankruptcy

If a person leaves you an inheritance but dies before you file for bankruptcy, the inheritance will be distributed amongst the creditors you owe. Your trustee will receive the inheritance and will distribute it accordingly. 

Getting An Inheritance After You File For Bankruptcy

If you get the news that you’ll be receiving an inheritance during bankruptcy, you need to tell your trustee. They will then reach out to the executor and provide them with all of the needed paperwork. When you receive the money from the inheritance, the money will be given to the trustee, who will use it to pay back the creditors.

Of course, if there is enough to cover all of your debts, the leftover money will be sent back to you. If you expect to have an inheritance in the near future, it can be a good idea to let your trustee know this before you file.

Getting An Inheritance After You’re Discharged From Bankruptcy

If a receive an inheritance after you’re discharged from bankruptcy, you can keep the inheritance. In this scenario, your creditors have no stake in your assets.

Tips On How To Keep Your Inheritance During Bankruptcy

It would be a shame to have your inheritance taken and handed out to your creditors because you’ve filed for bankruptcy. That said, you may be able to hang onto your inheritance during bankruptcy by having the process annulled. 

To do this, consider the following tips:

File A Consumer Proposal 

Like bankruptcy, a consumer proposal is a formal process that is facilitated by a Licensed Insolvency Trustee (LIT). 

Your trustee will work with you to come up with a proposal, which is an offer to pay your creditors a share of what you still owe them, extend the amount of time you have to repay your debt or a combination of both. 

If you file a consumer proposal with payment terms that allow you to receive the inheritance, you may be able to annul the bankruptcy.

Apply To The Bankruptcy Court

If your inheritance is more than the overall value of your debts, you can apply to bankruptcy court to request an annulment of the bankruptcy.

How Are Lottery Winnings Treated During Bankruptcy?

If you win the lottery during the process of bankruptcy, your winnings are the property of the bankruptcy estate. However, like with an inheritance, the entire amount you get isn’t at risk (unless you have a ton of debt). They will only take as much as they need to pay back your debts and any interest charges. Any excess money is yours to do with as you please.

How Are Other Financial WindfallsTreated During Bankruptcy? 

An inheritance is only one of several ways that you may come across a significant amount of money that may be vulnerable to bankruptcy. You might be lucky enough to win the lottery, receive a big tax refund or a raise at work. But what can happen to your winnings and other monetary windfalls if you file for bankruptcy?

When you file for bankruptcy, your creditors are repaid with your assets, which may include money from lottery winnings, tax refunds, RRSP withdrawals, and any other financial source. 

If you experience a financial windfall, this could complicate the bankruptcy process. Financial windfalls like winning the lottery are considered an asset, which would be included in the bankruptcy estate. 

As such, creditors can tap into whatever is in the estate to recoup their losses. You’ll only be entitled to whatever is leftover. 

What Happens If I Get A Big Raise? 

Bankruptcy also involves surplus income payments if you earn over a certain financial threshold. Surplus income payments involve paying 50% of the income you earn in excess of a specific limit based on your household situation. 

If you get a big raise, you may be required to pay surplus income until you’ve been discharged from bankruptcy.

Bankruptcy FAQs

Can financial windfalls create more tax debt?

In Canada, some financial windfalls are counted as taxable income. However, since no taxes are taken before you receive the windfall, you might still end up with financial obligations to pay.  You’re required to withhold the taxable portion of any large sum of money you receive and remit it to the Canada Revenue Agency (CRA). If you don’t, you could wind up with income tax debt.

What are surplus income payments?

Surplus income refers to the money you earn over and above your surplus income limit. Surplus income is charged at a rate of 50%, which means you’ll pay half of any surplus income you earn to your bankruptcy trustee, who will distribute this income to your creditors. 

Can I keep my house when I file for bankruptcy?

Filing for bankruptcy involves fulfilling your debt obligations, which means you may need to give up some of your assets to your creditors to make up for part of what you still owe them. One of the assets you may have to surrender is your home. The amount of home equity you have determines whether or not you can keep your house when filing for bankruptcy. Every province and territory has its own rules that detail which assets you can retain during bankruptcy. For instance, under Ontario law, you can keep your home if the equity in your home is not more than $10,000 and you keep up with your mortgage payments. 

Final Thoughts

While getting a huge unexpected payment during bankruptcy is a rare occurrence, there is always a chance it will occur, so you should be aware of what to do during that case. As long as you are open and honest with your licensed insolvency trustee, they will be able to help you through the process and let you know what you need to do. If you’re considering filing for bankruptcy and are looking for assistance, we can help!

Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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