The following question was posted to the Bankruptcy Canada Blog, and has been re-posted here, with an answer, since this is a very common question in Ontario when someone is making the decision to go bankrupt:
Question:
I live in Ontario. If I file for bankruptcy in Ontario and own a vehicle that is worth more than the limit, it is my understanding that I can pay the difference between its value and the limit. I also understand that if I cannot pay the difference I must forfeit the vehicle. Two questions:
- Am I correct in understanding that the money I would pay would have to come from post-bankruptcy income? i.e. I would have to find someone (relative, friend, etc.) that would loan me the money to pay the difference and then pay them back out of my post-bankruptcy earnings?
- If I forfeited the vehicle, would I be given back the amount of the limit in order to purchase another vehicle?
Answer:
You are correct. Currently a vehicle in Ontario is exempt if it is worth less than $5,650. If you owned, for example, a vehicle that had an appraised value of $6,650, you could pay into your estate $1,000 and keep your vehicle. (This example assumes that there are no liens against your vehicle; if you owe money against the vehicle, you would have to make pay the lender to keep the vehicle).
If you wanted to pay the $1,000 to keep the vehicle, the money could come from your earnings after you file bankruptcy, or you could borrow the money from friends or family (provided they understood that you were bankrupt).
Here’s where this gets complicated: On June 22, 2006, new legislation was passed in Ontario dealing with the equity in an automobile in a bankruptcy. Prior to June 22, 2006, an automobile was exempt from seizure if its value was less than $5,650. If the value exceeded $5,650, the entire amount was seized.
Under the new legislation, the first $5,650 is exempt from seizure. And, to answer the question, here is a quote from the Ontario Executions Act, paragraph 3(3):
Where exemption is claimed for a motor vehicle that has a sale value in excess of the amount referred to in paragraph 6 of section 2 plus the costs of the sale, the motor vehicle is subject to seizure and sale under a writ of execution and the amount referred to in that paragraph shall be paid to the debtor out of the proceeds of the sale.
Therefore if you surrendered the vehicle and the trustee sold it, you would be entitled to receive the first $5,650 of the proceeds, and you could use that money to purchase another vehicle, because paragraph 4(4) of the Executions Act goes on to say that:
The sum to which a debtor is entitled under subsection 3 (1), (2) or (3) is exempt from attachment or seizure at the instance of a creditor.
Clearly this is a complicated area, so if you own a car and are considering filing for bankruptcy in Ontario, you should contact a trustee and arrange for a no-charge initial consultation before you make any decisions.
Here’s a final thought. If you do own a valuable car, instead of going bankrupt and losing it, another option is to file a consumer proposal so that you can keep your car.
See also bankruptcy Ontario, bankruptcy car, consumer proposal.