Houses in Bankruptcy

September 4, 2019

What was once a relatively easy question “What happens to houses in bankruptcy?” to answer has become more complicated by court decisions and rules of equity.  When a person makes an assignment into bankruptcy, they “assign” everything they own to their trustee to see if there is anything of value to creditors.

Most common property such as furniture and household goods, clothing and personal effects, tools of the trade, vehicles (with capped values), RSPs and insurance policies are exempt from seizure by trustees.  Although there is a homestead exemption allowing bankrupt individuals to claim $10,000 of the equity in their residence as exempt from seizure, they may be required to make settlement with the trustee for the value of equity in excess of this threshold.

It used to be the case that trustees would value property at the commencement of the proceeding and would only pursue realization (collection of money) for the value of assets at that point in time.  A long-standing provision of the Bankruptcy & Insolvency Act vested “after acquired property” in the trustee, if the trustee signified an interest in the property.  After acquired property was typically thought of as lottery winnings, inheritances and gifts that devolved on the bankrupt after the date of bankruptcy but prior to the date of discharge.

However, in 2016 in a court case sometimes referred to as “the LePage decision”, the court decided in favour of the Attorney General for Canada acting for the CRA to provide trustees with direction as to how real property should be valued.  The court felt it was unfair that the equity from the bankrupt’s real property (that had increased substantially during the administration) should remain the property of the bankrupt and not be divisible amongst his creditors. 

Accordingly, trustees must now value real property twice during a bankruptcy administration, once at the beginning and the second time just prior to discharge.  Some real estate markets have seen explosive growth in value and in some cases, such as the aforementioned LePage, and conceivably property values could increase by $100,000 or more.  In such an instance the bankrupt must make settlement with the trustee in the form of new financing, agreed monthly payment terms or sell the house.

Although the prospect of such a settlement may be terrifying it only seems to happen in more volatile markets.  Most markets are seeing slower growth and many people are over-leveraged on real property anyway.