Top strategies to make yourself creditor proof in Canada

Posted on 8 August 2023

Written by Chris Galea

In today’s unpredictable economic landscape, protecting your assets from your creditors is an important consideration for both individuals and businesses. Creditors can find it difficult to recover the money they are owed from debtors, and so will take whatever action they can to reclaim their funds. In fact, creditors are able to sue you, and pursue legal action against you in the form of wage garnishments, bank account freezes, and placing a lien on your home. Making yourself creditor-proof means using strategic action to protect your assets from your creditors who want to seize them as part of the repayments they are owed. In Canada, there are a number of tactics you can take to try and protect your assets and financial wellbeing. In this article, we explore these tactics and see how you can make yourself creditor proof.

Top strategies to make yourself creditor proof

There are a number of legal actions you can take to make yourself creditor proof in Canada:

Incorporate a business

Incorporating a business is a way of separating your personal assets from any business liabilities that you have. By having a legal entity in place, if you are a sole proprietorship or partnership, you can limit any liability to your personal assets. This way, creditors wanting to collect debts from a business will have access only to assets belonging to the business, and not you own personal wealth.

Avoid property ownership in your name

Many debtors often panic that creditors can seize their homes in Canada. If you are a debtor, it is probably best if you do not have any property in your name. If you are married and your spouse is not a debtor, it is often better that they make the purchase in their name, or under a trustworthy family member. Another option is co-owning assets with another person who is free of debts, if it is not possible to make a purchase in their name.

Selling your property

Creditors are much more likely to take legal action over a debtor if they own property in their name. Judgment can be obtained by creditors to seize your home in Canada to recover the payments they are owed. If you think you will not be able to repay your creditors, it could be a good idea to put your property up for sale. This could help you to save any home equity you might have accumulated.

Transfer your assets to a family trust

Family trusts are a powerful way to protect your assets while maintaining control cover them. By moving your assets to a trust, you can separate legal ownership from beneficial ownership. This means that you can still use and benefit from the assets within the trust, while placing them beyond the reach of creditors. This is acceptable to do provided the trust has not been created to defraud your creditors or avoid debts that you may have.

Drive an affordable car

Every province in Canada has its own list of bankruptcy exemptions which means certain assets are excluded from being seized by creditors. This exemption threshold changes each year, but you are typically allowed around $10,000 for items in a property, including furniture and clothing. You can also keep a vehicle worth up to a certain value threshold, depending on your province of residence. For this reason, it makes sense to drive a more affordable car that you could keep.

The homestead exemption

In certain Canadian provinces – including Alberta, Saskatchewan, and Manitoba – the homestead exemption provides protection for some of an individual’s primary home from creditors. This exemption means that a value up to a certain threshold is protected from being seized by creditors should you face financial difficulties or file bankruptcy.

Check your exemptions

In Canada, some funds and assets are exempt from being seized by creditors. This includes:

  • Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) – these accounts are intended to provide financial security during retirement, and so they are exempt from creditors’ claims
  • Life insurance and annuities – life insurance policies and annuities cannot typically be seized by creditors in most scenarios
  • Exempt assets – including clothing, household furniture, and trade tools cannot be seized by creditors no matter what your financial situation

Do not do all your banking with the same institution

If you are struggling to pay your debts, it is not a good idea to conduct all your banking with the same financial institution. The funds in your bank account could be used to pay off creditors or any overdue credit card debts. If you owe money to the same bank and do not make your minimum monthly payment, your bank has the right (called a ‘right of set-off’) to take your minimum payment out of your bank account and use it towards repayment.

Avoid savings or chequing accounts

If you owe money to the Canada Revenue Agency, it can seize the money in your bank account and use it for repayment. The CRA is unparalleled in its powers to take action, and unlike other creditors, it does not need to obtain a judgment against you in order to do this. If you can survive without a chequing or savings account, this might be a good idea if you are worried about having funds taken from your account.

Try not to owe more than $3,000 to any given creditor

Most creditors will not take legal action (which can be incredibly expensive) against individuals who owe relatively small amounts of money. If you are able to spread out the debts you owe across multiple creditors, there is a good chance that none of your creditors will go to the time, effort, or cost of pursuing legal action against you for such a small amount of money.

Take advantage of wage garnishment laws that protect low-income workers

Outside of Ontario, every Canadian province has a law which has a ‘minimum exception’ from wage garnishments from any resident of the province. This law often provides welcome relief to individuals on a low income who might find themselves facing a wage garnishment. Depending on your unique financial circumstances, a portion – or all – of your wages might be protected from wage garnishment.

Move outside of Canada

Creditors and collection agencies have a poor history of reclaiming any funds owed from Canadians who choose to move outside of Canada. In fact, it is relatively rare to discover a Canadian creditor that has pursued legal action against a Canadian living outside of Canada and successfully received the money they are owed.

Speak to a Licensed Insolvency Trustee

If you want to learn more about making yourself creditor proof, you may wish to discuss your financial circumstances with a financial professional. Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief. They will review your financial situation, and can advise you on the most effective ways of becoming creditor proof by managing your debts responsibly and avoiding legal action. At Spergel, our expert Licensed Insolvency Trustees can help you to reduce or eliminate your debts entirely by filing a form of debt relief like bankruptcy or a consumer proposal.

Although becoming entirely creditor proof can be challenging, adopting some of the methods above can help to protect your assets and financial wellbeing. Speaking to an experienced Licensed Insolvency Trustee is advised to ensure your actions are compliant, but also so that you can gain a fresh financial future. Book a free consultation with one of the experts at Spergel. We have been helping Canadians to become creditor proof for over thirty years, and we are here to help you too.

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Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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