Recently, inflation has been a prominent topic of conversation across the country, coupled with the threat of a recession, some may be left wondering what a potential bankruptcy might mean for their estate plan. Bankruptcy is an unfortunate possibility for anyone in the modern world, and the prospect of being unable to care for dependents after you are gone can be uncomfortable. 

This blog post will review the consequences of filing for bankruptcy on an estate plan, and how a beneficiary’s declaration of bankruptcy can impact their inheritance. While this article summarizes the impact of bankruptcy in Ontario, further resources should be consulted for a clearer picture of how bankruptcy impacts Canadians.

What is Bankruptcy? 

Bankruptcy is a legal process by which a person is released from their debts, subject to certain conditions. In Canada, bankruptcy can occur in one of three ways: 

• A voluntary assignment, wherein an insolvent person (someone who is unable to pay the debts they owe) seeks bankruptcy,
• An involuntary assignment, where one or more of your creditors file a bankruptcy petition against you, or
• A deemed bankruptcy, where an insolvent person fails to meet certain requirements for a voluntary assignment. 

It is important to review the Government of Canada’s article on Bankruptcy for further information on bankruptcy in Canada. 

The Impact of Bankruptcy 

When a person declares bankruptcy, they must meet certain requirements before qualifying for a bankruptcy discharge. In some cases, they will need to liquidate assets or create a repayment plan for some of their debts before the court will release them from their debts. 

The types of court orders will depend on various circumstances, including the value of an individual’s debts and assets. 

How Bankruptcy Impacts Your Assets 

If you declare bankruptcy, you may be entitled to keep certain assets. For example, under the Bankruptcy and Insolvency Act, RSC 1985, c. B-3, the following property remains yours: 

• Property held in trust for another person;
• Goods and services tax credit payments;
• Property held in a registered retirement savings plan, registered retirement income fund, or registered disability savings plan;
• Prescribed payments relating to essential needs that are made to the bankrupt in prescribed circumstances;
• Property that is exempt from seizure under Ontario’s Execution Act, RSO 1990, c E. 24, as follows: 
  • Necessary clothing (including your dependents’ clothing)
  • Household furnishings and appliances, to a prescribed amount
  • Tools and other personal property related to your occupation, to a prescribed amount;
  • One motor vehicle within a prescribed amount;
  • Certain types of life insurance; and
  • RRSP, RRIF, and SPSP savings (except for contributions made in the 12 months before you declared bankruptcy).

Assets subject to the bankruptcy will become part of a bankruptcy estate managed by a bankruptcy trustee. However, it is important to note that a “bankruptcy estate” is not the same thing as an “estate” in the context of wills and estate planning. 

Bankruptcy and Estate Planning

In estate planning, a testator sets out how they want their assets to be managed and distributed when they die. Estate planning can also form a part of a short or long-term financial planning strategy. 

Several issues can arise when a testator has declared bankruptcy and has not yet been discharged from bankruptcy. Firstly, assets which form part of the bankruptcy estate cannot be distributed to beneficiaries. Additionally, any debts owing (whether concerning bankruptcy or otherwise) must be paid by the estate before any assets can be distributed amongst beneficiaries. Given the restrictions that arise in bankruptcy, there will likely be little left over for the beneficiaries when it comes time to distribute an estate. 

Bankruptcy and Your Estate

If you pass away before declaring bankruptcy, your trustee can file for bankruptcy on your behalf. Two options are available under the Bankruptcy and Insolvency Act, RSC 1985, c. B-3:

• A creditor may file a bankruptcy order against your estate: in this case, your estate may not make any payments or transfer property except as required for funeral and testamentary expenses until the application is disposed of, or 
• The trustee applies for leave to make an assignment in bankruptcy: in this case, the trustee assigns the estate’s property for the general benefit of the estate’s creditors. 

Following a bankruptcy order or assignment in bankruptcy, a trustee in bankruptcy will undertake the administration of the estate. In either case, the estate’s beneficiaries are only entitled to what remains after the estate’s creditors have been paid in full. 

Bankruptcy and Beneficiaries

Bankruptcy is a concern not only just for testators, but also for beneficiaries. 

If a bankrupt beneficiary stands to inherit from an estate, their inheritance may be included in their bankruptcy estate, regardless of whether they are inheriting cash or “physical” assets, like property. 

Depending on the type of bankruptcy declared, there may be options available to protect your inheritance. If you are in this situation, be sure to speak with an experienced estate lawyer for further guidance. 

Conclusions on Bankruptcy and Estate Planning

Sadly, bankruptcy can significantly impact the assets available to estate beneficiaries. In most cases, bankruptcy will likely negate any meaningful inheritance being left behind after a testator has passed away. 

However, bankruptcy is not a life sentence. Depending on the timing of your bankruptcy and discharge, you may still have plenty of years to recover from bankruptcy and leave a legacy for your estate. If you are facing the prospect of bankruptcy, the best steps you can take are to address your financial concerns quickly. Getting on top of any financial setbacks will help you obtain peace of mind and move forward. 

It is also important to remember that every bankruptcy case is unique and comes with different issues and obligations. While this blog post provides a high-level overview of the primary issues, it’s important to speak with a knowledgeable lawyer if you have declared bankruptcy or think you may need to. 

Contact the Wills & Estates Lawyers at Campbells LLP in Oakville for Advice on the Impact of Bankruptcy on Your Estate Plan  

Estate planning can be a difficult topic to approach, regardless of your circumstances, particularly in cases involving bankruptcy. However, effectively managing your wealth and protecting your estate is something everyone should do to ensure their express wishes are carried out. 

The best way to guarantee that your wishes are executed exactly as you would like is to consult an experienced estate lawyer. At Campbells LLP in Oakville, our wills lawyers have been helping clients with wills and estates matters since 1999. Contact us online or at (905) 828-2247 to schedule a confidential consultation.