Can you sell your house during a consumer proposal or bankruptcy in Quebec?

What is a consumer proposal, and what is a bankruptcy?

A consumer proposal is an offer to creditors under Division II of Part III of the Bankruptcy and Insolvency Act. Section 66.11 defines a consumer debtor as an individual who is bankrupt or insolvent and whose aggregate debts, excluding any debts secured by the individual’s principal residence, are not more than $250,000 or any other prescribed amount. Section 66.12 says the proposal is made to the creditors generally, and that its performance must be completed within five years. The same section 66.11 defines the administrator as a trustee, or a person appointed or designated by the Superintendent of Bankruptcy. The Office of the Superintendent of Bankruptcy says a licensed insolvency trustee is the only professional authorized to administer a consumer proposal or a bankruptcy, and it describes the same threshold in plainer words: total debts of less than $250,000, not including the mortgage (Bankruptcy and Insolvency Act, section 66.11) (Bankruptcy and Insolvency Act, section 66.12) (Office of the Superintendent of Bankruptcy, Consumed by debt?).

A bankruptcy is the other formal proceeding on that Office page. When you become bankrupt, the licensed insolvency trustee takes possession of your assets over and above those exempt under provincial or territorial law, sells the assets you turn over, and uses the money to pay creditors and the fees. Éducaloi describes a consumer proposal as an offer to settle debts, and a personal bankruptcy as a release from most debts by handing over some property (Consumer Proposals) (Personal Bankruptcy). If the debts, apart from a mortgage on the principal residence, sit above the line in section 66.11, the Office says a different proposal, a Division I proposal, may be available, and that if creditors do not accept a Division I proposal you become bankrupt automatically. That is a different file. This page does not choose one.

In a consumer proposal, can you keep the house and sell it?

You can keep it when the proposal is accepted and you follow it. The Office of the Superintendent of Bankruptcy says that, unlike a bankruptcy, if creditors accept the proposal and you follow its terms, you will be able to keep your assets, and it names the house as an example, along with a car and savings. It also says you keep your assets so long as you make your payments to your secured creditors. The mortgage is that secured debt. Section 69.2 says that filing a consumer proposal does not, by itself, prevent a secured creditor from realizing or otherwise dealing with the security, unless a court orders otherwise within the limits that section sets (Office of the Superintendent of Bankruptcy, Consumed by debt?) (Bankruptcy and Insolvency Act, section 69.2).

Section 69.2(1) says that once a consumer proposal is filed, no creditor has any remedy against the debtor or the debtor’s property, or may start or continue proceedings to recover a claim provable in bankruptcy, until the proposal is withdrawn, refused or annulled, or the administrator is discharged. That stay has exceptions, and the secured-creditor rule below is one of them. The Act does not move the house to the administrator the way a bankruptcy moves it to the trustee. Section 71, which says a bankrupt ceases to have any capacity to dispose of their property, is a bankruptcy rule (Bankruptcy and Insolvency Act, section 71). You remain the owner, so that vesting rule does not forbid a sale. If you are already bankrupt and then make a consumer proposal, section 66.4 says that court approval annuls the bankruptcy and revests the trustee’s interest in you, unless the terms of the proposal provide otherwise. Until that approval, section 71 still applies. Whether this house can be sold on these terms is a condition of the proposal itself. How the notary pays a hypothec from the price is in Can you sell a house with a mortgage in Quebec?.

Do you have to tell the administrator, and what happens to the equity?

At the start, the house is part of the file. Section 66.13 says proceedings start when the consumer debtor obtains the administrator’s assistance and provides the prescribed information on the debtor’s current financial situation. An administrator who agrees to assist must investigate, or cause to be investigated, the debtor’s property and financial affairs. The Office says that, once the proposal is accepted, you are responsible for the payments and for keeping to any other conditions in the proposal, and that you keep the assets so long as you pay secured creditors (Bankruptcy and Insolvency Act, section 66.13) (Office of the Superintendent of Bankruptcy, Consumed by debt?).

This page will not invent a rule that every proposal requires a written permission to sell, because the Act does not use those words. It also will not invent a split of the equity. What the Office does say is that you keep the asset if you follow the terms and pay the secured creditors. At a signing, the notary pays the hypothec from the price. What remains after that payment is a question the proposal’s own conditions answer. Ask the administrator before you sign. A price that does not cover the mortgage is a different clock, explained in Behind on your mortgage in Quebec: what happens and can you still sell?.

In a bankruptcy, who owns the house and who can sign the sale?

The trustee holds it for the estate. Section 71 says that on a bankruptcy order being made, or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which, subject to the Act and to the rights of secured creditors, immediately passes to and vests in the trustee. You cannot sell the house on your own after that. The Office of the Superintendent of Bankruptcy says the licensed insolvency trustee takes possession of the assets that are not exempt and sells the assets you turn over (Bankruptcy and Insolvency Act, section 71) (Office of the Superintendent of Bankruptcy, Consumed by debt?).

Section 30 says the trustee may, with the permission of the inspectors, sell all or any part of the property by private contract, among other ways. The permission is only for the thing it names. If no inspectors are appointed, the trustee may sell without them. A sale to a person who is related to the bankrupt needs the court’s authorization. Section 158 says the bankrupt must deliver the property in the bankrupt’s possession, execute the deeds the trustee requires, and aid in the realization of the property. You may be asked to sign. That signature follows the trustee’s authority. It does not replace it (Bankruptcy and Insolvency Act, section 30) (Bankruptcy and Insolvency Act, section 158).

Is a house in Quebec exempt in a bankruptcy?

Do not assume that it is. Section 67 says the property of a bankrupt divisible among creditors shall not comprise property that, as against the bankrupt, is exempt from execution or seizure under the laws of the province where the property is situated and where the bankrupt resides. It also excludes, among other things, property in a registered retirement savings plan, a registered retirement income fund or a registered disability savings plan, other than property contributed to any such plan in the 12 months before the date of bankruptcy. The exemption for a house, if there is one, has to be a Quebec exemption. A homestead described in another province is not that law (Bankruptcy and Insolvency Act, section 67).

Article 694 of the Code of Civil Procedure says a debtor’s movable property that furnishes or decorates the principal residence, is for the family’s use and is needed for the life of the family may be exempted from seizure, up to a market value of $7,000 determined by the bailiff, and, if that value has not been attained, the personal objects the debtor chooses to keep. Work instruments needed for the personal exercise of the debtor’s professional activity may also be exempted. Among other things, food, fuel, linens and clothing needed for the life of the debtor and the family are exempt. Those are movables. The article does not name the house. The same property may still be seized for the amounts owed on its sale price, or by a creditor holding a hypothec on it. Éducaloi’s list of what you can keep in a bankruptcy follows that pattern and does not include the house: RRSPs and RRIFs other than amounts paid in during the 12 months before the bankruptcy, up to $7,000 of items used for basic needs in the main residence, food, fuel, linens and clothing, work equipment unless a hypothec charges it, and a portion of salary determined by law (Code of Civil Procedure, article 694) (Personal Bankruptcy). The trustee applies section 67 to the file. This page will not quote an exemption for the residence that those texts do not give.

What happens to the mortgage when the house is sold?

The mortgage stays a secured claim, and it is paid from the sale. Section 71 vests property subject to the rights of secured creditors. Section 70 says every bankruptcy order and every assignment takes precedence over executions and over legal hypothecs of judgment creditors, except the rights of a secured creditor. In a consumer proposal, section 69.2 says the filing does not prevent a secured creditor from realizing or otherwise dealing with the security in the same manner as if that section had not been passed, unless the court otherwise orders, and the section limits how long any postponement can last. The hypothec itself is a Quebec real right. Article 2660 of the Civil Code of Québec says a hypothec confers the right to follow the property into whatever hands it may be, and to be preferred on the proceeds of a sale (Bankruptcy and Insolvency Act, section 71) (Bankruptcy and Insolvency Act, section 70) (Bankruptcy and Insolvency Act, section 69.2) (Civil Code of Québec, article 2660).

At a signing, the notary pays that secured claim from the price and publishes the discharge. The payout, a prepayment penalty and a shortfall are the subject of Can you sell a house with a mortgage in Quebec?. If payments are already behind, the prior notice is a separate clock, explained in Behind on your mortgage in Quebec: what happens and can you still sell?. A legal hypothec that is not the mortgage, such as a charge for work done on the house or a charge under a judgment, is a different registration, explained in Can you sell a house with a lien in Quebec?.

What if you sell the house before you file?

A sale can be reviewed later. This page will not describe how to put a house in someone else’s name, or how to set a price so that equity stays away from creditors. Section 95 is the preference rule. A transfer of property, a charge on property or a payment made by an insolvent person in favour of an arm’s-length creditor, with a view to giving that creditor a preference, is void as against the trustee — in Quebec, it may not be set up against the trustee — if it is made in the period that begins three months before the date of the initial bankruptcy event and ends on the date of the bankruptcy. If the transaction has the effect of a preference, that view is presumed unless there is evidence to the contrary. For a creditor who is not dealing at arm’s length, the period begins 12 months before the initial bankruptcy event and ends on the date of the bankruptcy, and the test is the effect of giving a preference. Section 2 defines a transfer at undervalue as a disposition of property for which the debtor receives no consideration, or consideration conspicuously less than the fair market value of the consideration the debtor gave (Bankruptcy and Insolvency Act, section 95) (Bankruptcy and Insolvency Act, section 2).

Section 96 lets the trustee ask a court to declare a transfer at undervalue void as against the trustee — in Quebec, that it may not be set up against the trustee — or to order a party, or a person privy to the transfer, to pay the estate the difference. For a person dealing at arm’s length, the transfer must have occurred in the period that begins one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, the debtor must have been insolvent at the time or rendered insolvent by it, and the debtor must have intended to defraud, defeat or delay a creditor. For a person not dealing at arm’s length, the court may do so if the transfer occurred in that same period, or in the five years before that period begins if the debtor was insolvent or was rendered insolvent, or intended to defraud, defeat or delay a creditor. Section 158 requires a bankrupt to disclose property disposed of from one year before the initial bankruptcy event to the date of the bankruptcy, and every transfer at undervalue from five years before the initial bankruptcy event to the date of the bankruptcy. Section 97 says that, between the initial bankruptcy event and the bankruptcy, a transfer for adequate valuable consideration made in good faith can be valid, and it stays subject to the preference and undervalue rules. Adequate valuable consideration, for a transfer of property, means a fair and reasonable money value relative to the property (Bankruptcy and Insolvency Act, section 96) (Bankruptcy and Insolvency Act, section 158) (Bankruptcy and Insolvency Act, section 97).

Section 101 is a different inquiry. It lets a court look at a dividend, other than a stock dividend, a redemption or purchase of shares, and certain payments to a director, officer or manager, when the bankrupt is a corporation. It is not the rule for a person’s house. Sections 95 and 96 are written around a bankruptcy and a trustee. Section 66.4 says that all the provisions of the Act, except Division I of Part III, apply to consumer proposals in so far as they are applicable, with such modifications as the circumstances require. This page will not treat a sale made before a proposal as automatically void under sections 95 and 96. The administrator is the person who says how a past sale sits in that file (Bankruptcy and Insolvency Act, section 101) (Bankruptcy and Insolvency Act, section 66.4).

Does a family residence change who must consent?

It can. That is a Quebec rule about consent, separate from who holds the file in a proposal or a bankruptcy. Article 404 of the Civil Code of Québec says that a spouse who owns an immovable with fewer than five dwellings, used in whole or in part as the family residence, may not, without the written consent of the other spouse, alienate it, charge it with a real right, or lease the part reserved for the use of the family. A spouse who neither consented nor ratified the act may apply to have it annulled if a declaration of family residence was previously registered. Article 405 requires that same written consent before the owner of an immovable with five dwellings or more alienates it or leases the part reserved for the family. Éducaloi says the protection is for couples who are married, in a civil union or in a parental union, not for other common-law couples, and that one owner cannot sell, or in some cases mortgage, the family residence without the other person’s consent or a court’s authorization (Civil Code of Québec, article 404) (Civil Code of Québec, article 405) (Protecting the Family Residence).

A bankruptcy does not, on the face of those articles, erase them. Section 71 puts the power to sell with the trustee. Article 404 still speaks to alienation of the family residence. The notary and the trustee read both on the deed. This page will not invent an exception the articles do not state. Who must sign in a separation, a civil union or a parental union, and what a registered declaration changes, is in Can you sell a house during a separation or divorce in Quebec?.

Who should you talk to before you sell?

A licensed insolvency trustee, before a buyer. The Office of the Superintendent of Bankruptcy says that if you are facing serious financial difficulties you will want to meet a licensed insolvency trustee, and that typically there is no charge for that first meeting. The trustee explains the proposal and the bankruptcy and plays an impartial role between you and the creditors. Bruce Malcolm buys houses himself in Montreal and on the West Island. He holds no broker, agent or appraiser licence, and he is not a licensed insolvency trustee. This page is not legal or financial advice (Office of the Superintendent of Bankruptcy, Consumed by debt?).

If the trustee says a sale can be discussed, Bruce can make an offer on the house as it stands. There is no inspection and no commission. You choose a signing date that leaves the notary, and the trustee where the trustee must authorize the sale or direct the money, the time the file needs. Sending the address starts a conversation (request an offer). It does not commit you, and it does not replace the trustee. The shorter page on the same situation is Sell a house in bankruptcy or before a proposal.