Receiving money out of the blue is something that people dream about. In your imagination, it is usually something random or unexpected, such as winning the lottery or finding out that you were the sole beneficiary of the will of your long-lost and extremely wealthy uncle.
In reality though, receiving money from sources other than your everyday income or investments is more often the result of an eventuality that is known – even if the timing is not, such as the receipt of an inheritance from your parents or the payout of a life insurance policy where you are the beneficiary. But what happens if this money becomes payable to you while you are in Bankruptcy?
When Am I Considered To Be In Bankruptcy?
Someone is normally considered to be “in Bankruptcy” from the time their Bankruptcy is filed with the Government of Canada, to the date they receive their discharge from that Bankruptcy. Their discharge from Bankruptcy is received after they have fulfilled the duties required of them by the process, the required period of time has lapsed, and their discharge is granted by their Trustee or the court of relevant jurisdiction.
During the time that they are in Bankruptcy they are considered to be an “undischarged bankrupt”, meaning that they have started the process but not yet received their discharge. During this time, their assets, with limited exceptions, are vested property of their Bankruptcy estate.
If you win the lottery, or are the beneficiary of a deceased person’s estate, investment or insurance policy that becomes payable to you while you are in Bankruptcy, this is also considered to be property that vests in your Bankruptcy estate. This applies whether the asset coming to you is a financial asset such as cash or an investment, or a physical asset such as a house or vehicle. It does not matter when you receive the asset – the important date is when the event occurred that resulted in the money becoming due to you. At that point, the asset becomes “receivable” to you, and therefore property of your Bankruptcy estate.
Once you are discharged from Bankruptcy, this ceases to apply. From that date on, assets that you receive are yours to keep and not deemed to be property of your Bankruptcy estate, as long as the event that triggered your entitlement to the asset did not occur before or during your Bankruptcy.
For this reason it is very important that you do your best to comply with the requirements of your Bankruptcy proceeding so that you can receive your discharge from the Bankruptcy as quickly as possible. The longer that you are in Bankruptcy without being discharged, the greater the likelihood that you could receive a windfall while bankrupt and therefore be required to surrender it to the Bankruptcy estate for the benefit of your creditors.
What Happens To The Windfall While Bankrupt?
If you are an undischarged bankrupt who becomes aware that you are due to receive a windfall, you must inform your Licensed Insolvency Trustee (LIT) of this fact. The LIT will make arrangements for the funds to be transferred to them for the benefit of your creditors.
Once the funds are held within the estate, they are subject to the regulations surrounding their handling and disbursement that are outlined in the Bankruptcy and Insolvency Act (BIA). The BIA provides that the funds will be used to cover the cost of the administration of the estate, certain regulatory fees, and to provide a distribution to the creditors that you owed money to when you filed for Bankruptcy.
If the funds in your Bankruptcy estate are sufficient to cover the necessary fees and disbursements and provide creditor payments that amount to 100% of the debt owed plus 5% interest for each year since the date of filing the Bankruptcy, there may be funds left over. Any remaining funds would then be paid to you.
Is This Different If I Receive A Raise Or Bonus At Work?
Yes. Income earned from employment, such as a raise or bonus that you may receive from your job, is treated as “income” in your Bankruptcy, not “property” as outlined above. Income earned while in Bankruptcy is governed by the “Surplus Income” provisions of the BIA, which determines what portion of your earnings must be paid into the Bankruptcy estate.
Generally speaking, the most that you would pay to your Bankruptcy estate from a raise or bonus at work would be 50% of the net amount paid to you. Once these payments are made into the estate, they become funds of the estate and are handled in the same manner noted above.
Windfalls can be a welcome surprise. But what happens when you receive unexpected money when you have filed Bankruptcy? Find out more in this podcast.
What Happens If I Am In A Consumer Proposal?
In a Consumer Proposal, assets – including windfalls – do not automatically vest in the Trustee and remain the property of the person who filed the Consumer Proposal. Instead the Consumer Proposal process is intended to result in a settlement agreement “up front”, at the time the Consumer Proposal is filed and then accepted by the creditors, based largely on your income and assets at the time and reasonable expectations of the near future.
Once the Consumer Proposal is accepted by the creditors it is a binding agreement that is enforced by the Bankruptcy and Insolvency Act and there is no requirement for the person who filed the Consumer Proposal to go above and beyond those terms. Therefore, unless your Consumer Proposal provides that the proceeds of a windfall is to be paid into the Consumer Proposal over and above the payments that were previously agreed upon, any windfall resulting from events that occur while you are in the proposal would be yours to keep.
Windfalls during Bankruptcy, and surplus income, can be complex topics depending on your situation. For a free consultation with an experienced member of our LCTaylor team, please call us a 204-925-6400 or email us at questions@lctaylor.net.
Daniel Maksymchak, LIT
