Receiving an unexpected sum of money is something many people dream about. Whether it’s winning the lottery, inheriting wealth from a distant relative, or receiving an unexpected payout, it’s easy to imagine the possibilities.
But what happens if this financial windfall arrives while you’re in Bankruptcy? The answer isn’t always straightforward, and it’s important to understand how these funds are treated within the Bankruptcy process.
When Are You Considered to Be “In Bankruptcy”?
You are officially in Bankruptcy from the moment your Bankruptcy is filed with the Government of Canada until the day you receive your discharge. Your discharge occurs once you have completed all required duties, the necessary time has passed, and either your Licensed Insolvency Trustee (LIT) or the court grants you a discharge.
Until that happens, you are considered an “undischarged bankrupt”, meaning you are still within the process and have not yet been released from your debts. During this period, most of your assets—including certain future assets—are considered part of your Bankruptcy estate.
What Happens If You Receive a Windfall While Bankrupt?
If you receive an inheritance, life insurance payout, legal settlement, or other unexpected financial gain while you are an undischarged bankrupt, that money becomes part of your Bankruptcy estate. This applies to both financial and physical assets, such as cash, investments, property, or vehicles.
It doesn’t matter when you physically receive the funds—the key factor is when the event occurred that triggered your entitlement. If the event happened before or during your Bankruptcy, the asset belongs to the Bankruptcy estate and will be used to repay your creditors.
However, if you receive a windfall after your discharge, it is yours to keep. That’s why it’s critical to complete your Bankruptcy duties as quickly as possible—the longer you remain undischarged, the greater the chance that a windfall could be claimed by the estate.
What Happens to the Money?
If you become aware that you are entitled to a windfall during Bankruptcy, you must inform your Licensed Insolvency Trustee (LIT) immediately. The funds will then be transferred to the Trustee for distribution according to the Bankruptcy and Insolvency Act (BIA).
Here’s how the funds are used:
- Estate Administration Costs – Covers Trustee fees and required regulatory payments.
- Debt Repayment – Any remaining funds go toward repaying your creditors.
- Potential Refund to You – If the windfall is large enough to repay 100% of your debts, plus 5% interest per year, any excess funds will be returned to you.
What About Salary Increases or Work Bonuses?
If you receive a raise or bonus at work during Bankruptcy, it is treated as income rather than an asset. This means it is subject to the Surplus Income rules outlined in the Bankruptcy and Insolvency Act.
What does this mean for you?
- If your income increases beyond the government’s allowable threshold, you may have to pay 50% of the surplus into the Bankruptcy estate.
- This applies to bonuses, overtime, commissions, or any other employment-related earnings.
- These payments will be added to the estate and distributed to creditors like other Bankruptcy funds.
What If You Are in a Consumer Proposal Instead of Bankruptcy?
A Consumer Proposal works differently than a Bankruptcy. In a Proposal, your assets—including windfalls—remain your property unless the agreement specifically states otherwise.
- The terms of a Consumer Proposal are set up front, meaning your creditors agree to a fixed settlement based on your income and assets at the time of filing.
- Once accepted, the agreement is legally binding, and you are not required to contribute additional funds if you receive a windfall—unless your Proposal explicitly states otherwise.
- This means that, in most cases, any unexpected inheritance, lottery winnings, or large financial gifts remain yours to keep.
What Should You Do?
If you are currently in Bankruptcy and receive unexpected funds, do not ignore it. Failing to disclose assets or income changes to your Trustee can impact your discharge and create legal complications.
Bankruptcy, windfalls, and surplus income can be complex, and every situation is unique. If you have questions about how a financial change might affect you, it’s best to get professional advice.
Get Expert Guidance Today
At LCTaylor, we specialize in helping Canadians navigate debt relief options, including Bankruptcy and Consumer Proposals. If you have concerns about how a windfall could impact your financial situation, we’re here to help.
Call us at 204-925-6400 or email questions@lctaylor.net to book a free, no-obligation consultation. Let’s work together to secure your financial future.
Let’s help you take the next step toward financial stability and peace of mind.
Leigh C. Taylor, LIT
