Joint or shared ownership in a family cottage is not uncommon. When one co-owner faces significant debts, enough to consider filing for bankruptcy, this raises substantial concerns with other owners about keeping the cottage “in the family”, and out of the hands of the bankrupt’s creditors. This is not an unusual scenario in our Toronto bankruptcy offices. This post will explain how the realization process works in a bankruptcy and what options you and your co-owners have if you wish to retain possession of a cottage, but file insolvency to eliminate your personal debts.
Bankruptcy and Real Estate
When someone files bankruptcy, their trustee is required to realize on all non-exempt assets to pay their creditors This includes real estate, including a personal residence or cottage, whether it is owned solely by the bankrupt or jointly with a spouse, siblings, or other partners.
There are rules in Ontario that allow the bankrupt an exemption for principal residence if, and only if, the total equity in the property is less than $10,000. Not many properties fall into this category.
Determining Fair Market Value of the Cottage
The first thing the trustee will do is determine the fair market value of the property. They will request an independent appraisal, and then deduct prior charges like mortgages and outstanding property taxes that would have to be paid if the cottage was sold. After these deductions, the equity in the property will have been determined.
If the bankrupt owns the property on their own, then this equity belongs to the creditors in full. If a property is owned jointly, or partially, the amount due to the creditors would be equal to the bankrupt’s share in the property.
Realization of Equity in Bankruptcy
Rarely are properties sold by the trustee. In the case of a jointly-owned cottage there are options:
Once the equity is determined, a negotiation will usually take place to sell the equity to the non-bankrupt owners or a third party. If the sale or amount is contentious, the trustee may obtain court approval of the sale. No one wants to take the family cottage away; the objective is to obtain the equity to pay the creditors.
There are rules that prevent a person selling or transferring a property for less than fair market value on the “eve” of filing a bankruptcy. The courts will overturn and reverse these transactions. Selling or gifting your share of the cottage to your siblings to avoid having the asset realized in a bankruptcy is not advised. The bankrupt is required to answer questions about pre-bankruptcy sales of assets and could be charged with fraud if they provide false information on their bankruptcy forms.
Consider a Consumer Proposal
If the bankrupt wishes to retain ownership of his or her share of the family cottage, they could file a consumer proposal. In a proposal, the debtor maintains ownership and control over their assets. In exchange, they make a settlement offer that their creditors can agree to accept, or not. If the proposal is accepted, the debtor has a contract with his creditors to settle their debts.
As you can see, there are options to allow you and your family to retain ownership of a cottage even if you need to turn to bankruptcy to solve other debt problems.