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The stress of having maxed-out credit cards or needing to use payday loan services just to get through the week can become a heavy burden to bear. If you’re feeling this pressure, you may be considering bankruptcy as a debt relief solution. However, while it can provide debt relief, you may be wondering how assets like an RRSP in bankruptcy are handled.

What Will Happen To Your RRSP In 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.

The assets you can keep during 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 contributions made during the 12 months prior to their bankruptcy. 

What Can You Do If You Contributed To Your RRSP In The Last Year?

If you made contributions to your RRSP over the past 12 months, you have a few options:

RSSP In Bankruptcy – Withdraw Your Contributions From The Past Year

You can simply withdraw the funds from your account. Your trustee can ask the bank or investment firm to withdraw the RRSP contributions you made over the last 12 months. The trustee will be responsible for paying the taxes owed on the withdrawal.

RSSP In Bankruptcy – Buy Back Your Contributions

You can choose to make extra contributions to your bankruptcy to buy back the contributions made over the last year. The same rule applies to other assets like an RESP. For example, if you’ve invested $2,000, you’d pay the $2,000 (minus taxes paid on it) over the term of your bankruptcy.

RSSP In Bankruptcy – File A Consumer Proposal Instead

If you made significant contributions to your RRSP over the past year and are concerned that these funds may be seized through bankruptcy, consider filing a consumer proposal. With this option, you won’t lose your RRSP or other seizable assets.

However, you’ll generally need to make higher payments than you would with bankruptcy. 

RSSP In Bankruptcy – Stop Making RRSP Contributions

If you’re not concerned about wage garnishment, you may consider not making any further contributions to your RRSP. The extra money that otherwise would have been contributed can go toward paying your bills and getting you out of debt.

Are RRSP Transfers Considered New Contributions? 

If you transferred savings from your RRSP to another company within the last 12 months from when you declared bankruptcy, it won’t be considered a payment. As such, you won’t need to surrender it.

What Are RRSPs?

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 investments are not subject to income taxes until you begin to withdraw funds. At that point, you must 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.

Will My Other Investments Be Safe During A Bankruptcy?

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 TSFA (Tax-Free Savings Account) and RESPs (Registered Education Savings Plans), which people often assume will be exempt.

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. However, the following investments are generally protected from bankruptcy:

  • Spousal RRSP
  • Registered Retirement Income Funds (RRIF)
  • Registered Disability Savings Plan (RDSP)
  • Deferred Profit Sharing Plan (DPSP)
  • Registered Savings Plan (RSP) with Life Insurance

DPSP And Bankruptcy 

A Deferred Profit Sharing Plan (DPSP) is registered with the Canada Revenue Agency (CRA). It is an employer-backed profit-sharing plan, which means employers can share their business profits with employees.

In terms of bankruptcy, a DPSP is treated the same way as an RRSP, which means you won’t lose the funds in your DPSP when you declare bankruptcy unless you’ve made contributions within the last 12 months. Generally speaking, employees are not allowed to withdraw from their DPSP while they’re still employed with the company sharing the profits. As such, all funds in a DPSP can be protected.

RDSP And Bankruptcy

A Registered Disability Savings Plan (RDSP) helps parents to save up for the financial security of an individual who qualifies for the disability tax credit (DTC). Generally speaking, there are no specific stipulations in the Bankruptcy and Insolvency Act (BIA) in regard to how RDSPs are dealt with in bankruptcy.  

However, certain provinces have placed regulations on how an RDSP can be treated during bankruptcy. For example, funds held in an RDSP in British Columbia are not allowed to be seized in bankruptcy to satisfy debts owed to creditors. 

Locked-In Pension Plans And Bankruptcy

Locked-in pension plans that are registered are exempt from seizure in a bankruptcy filing. Even recent contributions are protected. 

Should You File For Bankruptcy?

When a person is in deep financial trouble, they can often jump to bankruptcy. However, bankruptcy isn’t the only debt relief option available. A consumer proposal is a formal and legal process of working out payment plans with creditors. 

Debts can be reduced, including personal loan debts, payday loan debts, credit card debts and other unsecured debts.  Moreover, payment terms can be as long as 5 years under a consumer proposal, making repayment much more manageable. Moreover, unlike bankruptcy, you get to keep most of your assets. 

When Is Bankruptcy A Good Option?

If you’re unable to afford your payment plan under a consumer proposal, then bankruptcy is a good option. Generally, when a person files for bankruptcy, they surrender most of their assets in order to eliminate debts.

How Does Bankruptcy Work?

Step 1 – Meet With A LIT. First, you will need to consult with a federally Licensed Insolvency Trustee (LIT). They are professionals that are highly trained in debt management. They will advise you of your options and help you through the process, should you choose to file for bankruptcy.

Step 2 – Assess Your Situation. You will need to provide your trustee with personal information and lists of your debts and personal assets. You’ll also need to file any back taxes.

Step 3 – Stay Of Proceedings.  Any money owed will be included in the bankruptcy proceedings. Creditors will no longer be able to contact you with payment requests, they will not be able to garnish your wages or follow through with lawsuits.

Step 4 – Make Your Payments. You will need to make regular payments for the length of your proceedings.

Step 5 – Go To Your Counselling Sessions. You will be required to attend credit counselling sessions.

Things To Consider When Filing Bankruptcy

Bankruptcy can bring tremendous peace of mind, but there are some costs to consider.

  • Loss of assets
  • A record will remain on your credit report for seven years. Check your credit for free with CompareHub by Loans Canada. 
  • You will need to rebuild credit as if you have never had it before, starting with small amounts of credit and paying them off each month.
  • It can be difficult, at first, to obtain credit and you might have to pay higher interest because you are viewed as a risky borrower.
  • You may experience a roller coaster of emotions throughout the process, from guilt to feelings of failure, to utter relief.

Bottom Line On RSSP And Bankruptcy

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 and therefore they cannot be seized.

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.

If your financial issues are serious enough you might be considering cashing in RRSPs to pay off your debt to avoid bankruptcy. This may seem sensible right now but you may want to reconsider. If you still end up filing and you’ve already given up your savings, it will be challenging 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.

FAQs On RRSP In Bankruptcy

How long does bankruptcy last?

First-time bankruptcies are typically discharged after 9 months, unless you earn a surplus income, fail to make payments, or your creditors file an objection to the discharge. If you earn a surplus income, your first-time bankruptcy could last 21 months. Second-time bankruptcies can last 24 months if you don’t earn a surplus income, or 36 months if you have a surplus income.

Should I use my RRSP to pay down my debt?

It’s not recommended to use your RRSP funds to pay down your debt. If you don’t get your financial health in check, you’re simply prolonging your troubles, even if you tap into your RRSP. Before you take this step, speak with a Licensed Insolvency Trustee (LIT) to see what your options are.  RRSPs are protected in bankruptcy, so these funds cannot be seized (except contributions made in the last 12-month period). As such, it doesn’t make much sense to use these funds to pay your debt in an effort to avoid bankruptcy.

Which assets are not protected during bankruptcy?

Some of your assets may be seized and sold when you file for bankruptcy to repay your creditors. Common assets that may not be protected include the following:
  • A second automobile
  • Valuable jewellery, artwork, and collectibles 
  • Stocks, bonds and investments not in a registered account
  • Home equity, with some exceptions
  • A second home
  • Inheritances
  • Cash in your bank account, except what’s needed to cover basic living expenses
  • A tax refund on income up to the filing date
Lisa Rennie avatar on Loans Canada
Lisa Rennie

Lisa has been working as a personal finance writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same.

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