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Will I Lose My RRSPs if I Declare Bankruptcy?
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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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What is Bankruptcy?
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:
- lower value vehicles
- personal and household items
- a limited amount of equity in your home.
Some debts are exempt from bankruptcy proceedings and will still need to be repaid, including:
- student loans
- child support
Learn how to finally become debt free, here.
How Does Bankruptcy Work?
- First, you will need to consult with a federally Licensed Insolvency Trustee (formerly known as a Bankruptcy Trustee), a professional and 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.
- You will need to provide your trustee with personal information and lists of your debts and personal assets.
- You will need to file taxes and 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.
- You will be required to attend credit counselling sessions.
- You will need to make regular payments for the length of your proceedings.
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.
- Loss of assets
- A record will remain on your credit report for seven years.
- 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.
Read this to learn how to rebuild your credit after bankruptcy.
What About My RRSPs?
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.
Will I Need to Give Them Up?
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:
- Spousal RRSP
- Registered Retirement Income Funds (RRIF)
- Registered Disability Savings Plan (RDSP)
- Deferred Profit Sharing Plan (DPSP)
- Registered Savings Plan (RSP) with Life Insurance
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.
One Last Thought . . .
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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Margaret Johnson is in the business of helping Canadians tackle their debt, deal with credit issues, and regain control of their finances.