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After Acquired Property – Bankrupts Beware

May 25, 2022

After acquired property is any property that is acquired by a Bankrupt, by any means, after filing for Bankruptcy and before getting discharged.  There are many different ways this property may be acquired including inheritances, gifts and even savings.  Unusually, since the housing boom began, and houses have been doubling and tripling in value – the increase in the value of your home is considered “after acquired property”.

Unexpected Increases in Equity:

It used to be that LITs were only concerned with the value of property at the time of filing the Bankruptcy, if the value increased after the date of filing the upside would belong to the Bankrupt.  In 2016 a Court Case (LePage) involving a Bankrupt whose property had unexpectedly shot up in value became the target of a claim by the CRA for “after acquired property”.  Even though the Bankrupt had no control over the real estate market and was forthcoming about its value at the time of Bankruptcy, the CRA was able to convince the Court that the increase in equity was property divisible amongst the Bankrupt’s creditors.

In the 2004 Marino case, the Bankrupts owned a corporation they had assigned into Bankruptcy, the corporation held a second mortgage on the Bankrupt’s house.  When the Trustee was assessing the value of the home it allowed two mortgages (including the one held by the corp.) to reduce the value of the equity in the real property leaving no equity for the Bankrupt to settle for.  However, after the Bankrupt was discharged, a diligent member of the Trustee’s staff realized the mortgage was not being paid to the Bankrupt corporation and therefore the property had substantial value.  By removing the defaulted mortgage from the equation, the Bankrupts had “after acquired property”.  The Bankrupt was returned to Court in an attempt by the Trustee to resolve the outstanding issue.  In this case the Judge found in favour of the Bankrupts who relied on the Trustee’s statement of estoppel.

A more recent case, Kim, Hyung Jong, has reinforced the decision in the LePage case, Justice Kimmel ruled that the Bankrupt did have “after acquired property”.  In this case, the value of the property increased after the filing of Bankruptcy and the Bankrupt was required to make settlement with the Trustee for the increased value of equity.  The Bankrupt was unable to rely on any statements of the Trustee because, unlike the Marino case, the Trustee had not yet closed the file.

Unexpected Decreases in Equity:

What happens if things go the other way?  Imagine for instance a correction in the housing market that caused house values to plummet – that situation also ought to be considered.  For example, if the Trustee determined at the outset there was $50,000 worth of equity in real property but after a few months house prices dropped leaving the Bankrupt in a negative equity position the requirement to repurchase the equity would no longer exist.  However, if the Bankrupt had already paid the Trustee $20,000 (or so) for the equity should the Bankrupt be reimbursed?  The Trustee’s job, in part, is to make recoveries from assets of the Bankrupt – the Trustee is not obligated to return the funds and could argue that the “after acquired property” was not equity in real property but savings.  Savings can also be deemed, to be after acquired property and may be seized by a Trustee. 

Intervention of the Trustee:

Section 99 (1) of the Bankruptcy & Insolvency Act protects both the Bankrupt and the Trustee.  If the Trustee does not intervene by acting to realize on after acquired property, the Bankrupt may keep the property.  However, if the Trustee does act, the Trustee is within its rights, should the Trustee not wish to act it can release its rights to act to any creditor interested in pursuing the matter.

Examples of After Acquired Property:

Substantial gifts, inheritances, insurance beneficiaries, lottery winnings, bonuses, Court awards, settlements, and more.  For more information call the office at 519-646-2222