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Sometimes, an individual or a family can feel like they are drowning in debt and can’t see any way out. In some cases, it’s poor spending habits that have resulted in consumer debt. Some people run into bad luck with an illness, an accident, or loss of employment, resulting in loss of income.
The stress of having maxed out credit cards, needing to use payday loan services just to get through the week, or having collection agencies calling on a regular basis can become a heavy burden to bear.
When people feel this kind of pressure and they finally seek help, debt consolidation or credit counseling may be an option. Unfortunately, if your income isn’t high enough to make reasonable payments, claiming bankruptcy may be a necessary alternative.
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When a person is in deep financial trouble, they can often receive help by filing a consumer proposal, a formal and legal process of working out payment plans with creditors. Debts can be reduced as well as payment times so that repayment becomes much more manageable. As of 2015, consumer proposals began to outnumber bankruptcies and are a great option for those who can afford the payments.
Sometimes, income is simply too low, and repayment is impossible. In this case, bankruptcy is the only option. Generally, when a person files for bankruptcy, they surrender most of their assets in order to eliminate unsecured debts.
An individual may be allowed to keep some assets, such as:
Some debts are exempt from bankruptcy proceedings and will still need to be repaid, including:
Learn how to finally become debt free, here.
If this is your first time, you will usually receive a discharge after 9 months, unless you default on payments, make more money, or your creditors file an objection. Otherwise, the period before discharge may be lengthened.
Bankruptcy can bring tremendous peace of mind, but there are some costs to consider.
Read this to learn how to rebuild your credit after bankruptcy.
You’ve worked hard to set funds aside for your future so if you are thinking of declaring bankruptcy, you might be wondering what will happen to your retirement savings.
Often, people will need to surrender their investments, in the case of insolvency, so that the funds can be divided between creditors. This even includes RESPs (Registered Education Savings Plans), which people often assume will be exempt.
Registered Retirement Savings Plans (RRSPs) are individual investments, registered by the government and intended to be used for retirement savings. As you pay into the plan, your investment is not subject to income taxes until you begin to withdraw funds. At that point, you will need to claim the income on your tax return that year.
Similarly, when you make payments into a Registered Pension Plan (RPP), through your employer, your funds are exempt from tax until you begin to declare it as income.
The assets you can keep during a bankruptcy vary from province to province. Fortunately, according to the Bankruptcy and Insolvency Act, section 67 (1) (b.3), which governs all of Canada, individuals claiming bankruptcy can keep their RRSPs, except for money contributed during the 12 months prior to their bankruptcy. If you transfer savings from your RRSP to another company, it won’t be considered a payment, so you will not need to surrender it.
The rules for other registered savings plans vary by province so you will need to check with your insolvency trustee about the details of your situation.
Other investments protected from bankruptcy may include:
If you cannot access your funds until retirement because they are locked-in by an employee pension plan, your trustee can’t access them either. They cannot be seized.
Will filing for bankruptcy affect my spouse? Find out here.
So, most RRSP holders can rest easy on this issue. Across the country, Registered Retirement Savings Plans are protected, even if you must file for bankruptcy. You may lose some cash if you’ve contributed to your plan recently, but chances are that money has been too tight to make regular payments for the last little while.
If your financial issues are serious enough you might be considering cashing in RRSPs to pay off your debt, in a last-ditch attempt to avoid bankruptcy. This may seem sensible right now as the interest being accumulated on your debt is higher than the interest coming in on your investment, but you may want to reconsider. If you still end up filing and you’ve already given up your savings, it will be difficult to provide for your senior years.
Talk to a licensed insolvency trustee who can assess your situation and help you find the best solution for your debt relief.
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Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
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