D. Post-Bankruptcy Property

Author:Roderick J. Wood
Profession:Faculty of Law. University of Alberta

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1) After-Acquired Property

The property vesting in a trustee is not limited to the assets in existence at the date of bankruptcy. It extends also to assets that are acquired by the bankrupt following the bankruptcy. The vesting of after-acquired property in the trustee occurs automatically and does not require any intervention or act on the part of the trustee.167Where the bankrupt is an individual, the vesting of after-acquired property covers only the assets that are acquired by the bankrupt before he or she obtains a discharge. Post-discharge assets therefore do not vest in the trustee, and creditors will not be able to look to these assets to satisfy their claims unless their claims fall within the limited class of claims that survive a bankruptcy discharge.168Because of the difference in treatment between pre-discharge assets that vest in the trustee and post-discharge assets that do not, there are sometimes disputes over precisely when a right arises. A pre-discharge

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asset that is subject to a contingency that is subsequently satisfied after the bankrupt’s discharge is nevertheless caught by the wide definition of property and vests in the trustee. A trustee is therefore entitled to claim lottery winnings that are announced after discharge but that arise out of a ticket acquired before discharge.169The fact that the trustee has obtained a discharge does not affect this outcome, since the trustee can apply to be reappointed in order to claim the property.

In one case, an undischarged bankrupt obtained an inheritance on the death of her mother. The testamentary gift was subject to the condition that the beneficiary survive for thirty days following her mother’s death. The contingent right vested in the trustee as after-acquired property and was not affected by the discharge of the bankrupt before the determination of the contingency. In the event that the bankrupt survived for thirty days, the money would be available to the trustee.170A contingent right must be distinguished from an incomplete gift or a mere expectancy. A beneficiary under a will does not obtain any interest prior to the testator’s death and therefore has no right that can vest in the trustee. The possibility of a future inheritance is sometimes a factor that a bankruptcy court will consider in determining the appropriate order of discharge of the bankrupt,171but it does not alter the principle that a mere hope to receive an inheritance is not an asset that vests in the trustee.

In appropriate cases, the trustee can rely upon tracing principles to assert a claim against other assets that have been acquired after the bankruptcy by a third party using property that vested in the trustee in bankruptcy. In F.C. Jones & Sons v. Jones,172Mr. Jones transferred funds that had vested in the trustee in bankruptcy to his wife, who increased its value by five times through trading in the potato futures market. The trustee in bankruptcy was able to trace the value to this fund and claim the entire amount as property of the bankrupt estate.

2) Surplus Income

The BIA provides a major exception to the principle that assets acquired after the bankruptcy but before discharge of the bankrupt vest in the

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trustee. The exception applies only to an individual. Unlike corporations or other artificial entities that cease to operate after a bankruptcy, natural persons must carry on with their lives. They must earn income to pay for food, shelter, and other necessary expenses. Bankruptcy law recognizes this need through a special regime that governs income earned by the bankrupt between the date of bankruptcy and the date of the bankrupt’s discharge. This regime determines how much of this income can be retained by the bankrupt and how much should be paid over to the trustee for distribution to the creditors.

Before 1966, income earned by an individual bankrupt vested in the trustee as after-acquired income. Provincial law provided that a certain portion of wages was exempt in garnishment proceedings, and this exemption was effective in bankruptcy.173This was changed in 1966, when a new provision was introduced that provided a procedure that a trustee could invoke to attach the post-bankruptcy earnings of the bankrupt. Through this mechanism, a trustee could apply to a court for an order directing the payment of a portion of the wages, salary, or other remuneration. This procedure was problematic in that the court was given no guidance regarding the amount to be retained by the bankrupt, other than a direction that it should have regard to the family responsibilities and personal situation of the bankrupt. As a result, there was significant inconsistency in its application.

In 1997 the provision was completely overhauled. The requirement of a court application was eliminated, and the trustee was given a much more limited discretion on whether to proceed against post-bankruptcy income. Instead, the trustee must have regard to a directive established by the superintendent in bankruptcy that sets out the standards for making the determination. The 2005/2007...

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