The Elephant in the Room for Insolvency Trustees
A 2016 Ontario Superior Court decision could be a game changer for some people filing for bankruptcy.
Those most likely to be affected are individuals residing in volatile real-estate markets such as Toronto, Vancouver or Montreal as well as individuals who are in longer term bankruptcy administrations. People filing a second or third bankruptcy and those who do attend to their duties in a timely manner resulting in protracted proceedings may end up paying significantly.
The decision dealt most significantly with how a trustee should deal with real property at the time of discharge. Hitherto, the accepted wisdom has been for the trustee to value the property at the time of filing the bankruptcy to determine if there is any equity for which the bankrupt must make settlement. However, the LePage case changed that notion requiring the trustee to obtain a subsequent valuation at the time of discharge to confirm that the value of the property has not increased to the extent that it makes equity available for creditors.
The implications for Canada’s bankruptcy regime are potentially enormous. This may be especially so if the Ontario Homestead Exemption, under Section 2 (2) of the Execution Act RSO, remains at the $10,000 level and if notional (selling) costs are not allowed in negotiating settlements. The most basic premise of entry level home ownership is that purchasers should have some skin in the game, a minimum of 5% down payment. Accordingly, if the value of the property exceeds $200,000, with one owner on title, then the exemption is automatically chewed up and the result is equity for which the bankrupt must make settlement.
Let’s consider two possible outcomes. We will assume that the property is worth $200,000 at the time of bankruptcy but nine months later when the bankrupt becomes eligible for an automatic discharge the value increased by $10,000 to $210,000. The mortgage on the property is for 95% of the property’s value at the time of filing – so the mortgage is for $190,000.
1. The trustee, court and or creditors do not allow notional costs: The bankrupt may claim an exemption for $10,000 which added to the mortgage value leaves a remainder amount of $10,000 that the bankrupt must repay into his/her estate for the benefit of creditors.
2. The trustee, court and or creditors do allow notional costs: If notional costs are allowed they would typically include such items as the realtor’s commissions and the legal fees associated with the transfer – even though not actually paid they would be payable in some measure in all property transfers or sales to get at the equity of the property.
It would appear, without an appeal to the decision, that insolvent property owners should consider some form of a proposal as an option to dealing with their debt issues. However, that opens up another Pandora’s box in that creditors might consider the interplay of projected future values of property in negotiating proposals with insolvent individuals. At bottom this appears to be a very daunting challenge to Canada’s insolvency regime locking people into unrealistic debt situations. I probably do not need to provide any more information for how this affects residents in markets such as Toronto where real estate values increase dramatically in very short periods of time.
Hopefully the courts can turn their attention to the ethos of lending and force regulation on exploitative lending practices that politicians are shying away from.