Are Your Retirement Savings At Risk of Seizure?
If you’re considering filing for bankruptcy, you likely already know that many of your assets will be subject to seizure in order to pay off your creditors. But you may wonder whether or not your registered savings plans are safe from seizure.
Keep reading to learn how these savings plans will be affected.
Bankruptcy is a legal process governed by the federal Bankruptcy and Insolvency Act (BIA) that allows Canadians who cannot pay back their debts to make a fresh start. The process is administered by federally regulated Licensed Insolvency Trustees (LITs).
What Happens to Assets During a Bankruptcy?
When you file for bankruptcy, many of your assets will be seized and sold by your LIT, with the proceeds held in trust to be divided among your creditors. Some of your assets are exempt from seizure, but in general, you can expect that your home, any other real estate, and vehicles may be seized (with some exceptions), as well as any valuable jewelry, artwork, other high-value collector’s items, income tax refunds, cash, and investments.
What About Savings Plans?
Many Canadians have money stashed away in various savings plans, some of which are registered with the government. Some of these plans are protected from seizure during a bankruptcy, either partially or entirely, while others are not.
Registered Retirement Savings Plans (RRSPs) are very popular, and many Canadians contribute to them in preparation for their later years. If you file for bankruptcy, all of the money you have saved in an RRSP is protected from seizure, with the exception of any contributions you have made in the past 12 months. If your RRSP has a life insurance component, it is safe from seizure if the beneficiary is your spouse, child, parent, or grandchild pursuant to the Insurance Act of Ontario.
If you have made contributions to your RRSP in the past year, either the LIT will withdraw those contributions directly from the plan or you can pay the LIT the equivalent sum (known as “buying back” your contributions), which allows you to maintain your current RRSP balance.
Registered Education Savings Plans (RESPs) are not exempt. The contributions made to the plan will be seized and paid towards your creditors if you file for bankruptcy. The government grants received will be returned to the government.
Tax-Free Savings Accounts (TFSAs) are not exempt from seizure under a bankruptcy filing. Funds in these accounts are treated the same way as cash or investments and will be seized and paid towards your creditors.
Registered Disability Savings Plans (RDSPs) are also now exempt from seizure, with the exception of any contributions you have made in the past 12 months, due to recent changes to the BIA.
A Deferred Profit Sharing Plan (DPSP) is treated in the same manner as RRSPs and RDSPs during a bankruptcy, in that only contributions made during the last 12 months are subject to seizure.
Locked-In Pension Plans
All locked-in pension plans are entirely exempt from seizure during a bankruptcy, since the account holder does not have access to these funds.
A Registered Retirement Income Fund (RRIF) is handled the same way as a RRSP, RDSP, and DPSP during the bankruptcy process; that is, only the contributions made during the last 12 months can be seized. However, it is unlikely that someone drawing income from a RRIF is also contributing to it.
Reasons to Consider a Consumer Proposal Instead of Bankruptcy
If you have significant assets that would be subject to seizure and sale under a bankruptcy, consider entering into a consumer proposal instead. This is an agreement that you make with creditors to pay back a portion of what you owe over a fixed period of time. Here are some of the benefits of a consumer proposal:
No Loss of Assets/Savings
If you enter into a consumer proposal, none of your assets or savings will be seized. Instead, you and your LIT review your finances and set up a repayment plan that works for your income and financial situation. You may choose to sell some assets or cash in some savings to repay your remaining debts more quickly, but no one can compel you to do so.
Reduced Debt Load With Payment Plan You Can Afford
A consumer proposal is just that: a proposal that your LIT presents to your creditors on your behalf, advising them of how much of your debt you are able to repay. That number may be as low as 30% of what you actually owe, but sometimes, it can be as high as 50% or more. Regardless, in most situations, it will not be the full amount of your debt. The LIT also helps you determine how much you can afford to repay each month or in several lump sums.
Reduced Impact on Credit
Make no mistake: a consumer proposal does negatively affect your credit rating. Your score will drop for a period of time. However, the lowest level is reserved for those who file for bankruptcy, so you’re escaping that fate.
Once your consumer proposal is in effect, your creditors can no longer call or write to you demanding repayment or send your file to collections agencies. Any legal actions they may have brought against you are stayed, and no new legal action can be taken for the duration of your proposal.
Bankruptcy is not intended to ruin the rest of your life, but to help you make a fresh financial start. That’s why RRSPs and some other registered savings plans are protected under bankruptcy laws. But if you have a lot of unprotected assets, you may be better off making a consumer proposal rather than a bankruptcy filing. A Licensed Insolvency Trustee can help you with that decision.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee based in Ottawa. We service Ottawa and most of eastern Ontario. We have helped thousands of individuals and couples successfully resolve their debt challenges since 2002. Its passion – its mission – is your health and well-being!