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RRSP and Bankruptcy Details You Need to Know

Most people have questions when it comes to their finances. This is especially true when it comes to dealing with debt and it’s certainly the case when it comes to filing bankruptcy. Some of the most common questions involve RRSP and bankruptcy.

Your RRSP (Registered Retirement Savings Plan) is money that is supposed to be there for you when you retire. Most people work very hard their entire lives to save up enough to retire comfortably. If you have money saved in an RRSP, it’s only natural that you will want to know what might happen to this money if you should run into financial difficulties. Nobody wants to lose money that they have worked for years to save, especially when this money is supposed to make your retirement more comfortable.

However, financial difficulties do happen. Even if you have been managing your finances well and putting aside money for retirement like you’re supposed to, you can still end up in a situation where you take on more debt than you can afford to repay. If you are in a financial situation where you are unable to pay your bills as they become due, filing for bankruptcy could be the right option for you.

A lot of people worry about RRSP and bankruptcy issues. They are frequently concerned that they will lose their retirement savings if they file for bankruptcy. Sometimes these concerns keep people struggling since they are unsure of how seeking debt relief options will affect them, so they don’t look at the options.

However, it is important to fully understand the financial options that are available to you and the specific details of these options. Finding debt relief is possible and you want to have all the information on your options before you make a decision.

What Happens in RRSP and Bankruptcy Situations?

The bankruptcy process is designed to give people who are unable to meet their financial commitments an option to eliminate their debts and start fresh. If you are overwhelmed by debt and unable to pay your bills as they become due, bankruptcy may be an option to consider.

However, there are aspects of the bankruptcy process that you’ll want to be aware of before you decide how to proceed.

  • Depending on what you own, you may lose some of your assets
    • However, it is a common misconception that you lose everything you own when you file. This is not true. The process is designed to give people a chance to start fresh. If you lost all of your assets through the process, starting your financial life over would be nearly impossible and thus the process would not be very effective.
    • In general, you are allowed to keep items that are necessary to live a basic lifestyle as well as “tools of the trade” which are required to earn an income. Each province has its own list that details the specifics of what you are allowed to keep.
    • When it comes to RRSP and bankruptcy filing, the Bankruptcy and Insolvency Act of Canada (which outlines and regulates the bankruptcy process) states that funds in a registered retirement plan are protected, other than those that were made in the last 12 months. This includes portions that were deposited by an employer (in the case of employer matching programs).
    • This means you will not lose the money in your RRSP as long as it was invested more than 12 months ago.
    • In situation where your RRSP is “locked in” until retirement (which is the case in many employer programs that are designed to provide pension benefits), then these assets cannot be seized as a part of the bankruptcy process. “Locked in” programs cannot be cashed in until retirement. This means you cannot take the money out of the account until you retire.
    • Registered Pension Plans as well as RSPs or life insurance policies that have a preferred beneficiary (such as a child, spouse, or parent) are also exempt and will not be lost if you file for bankruptcy.

Many people have questions about RRSP and bankruptcy situations. The good news is that, before you file, you can ask these questions and get the information you need.

Bankruptcies in Canada can only be filed by a Licensed Insolvency Trustee. When you meet with the trustee, you will be able to ask any questions you have. The trustee will tell you exactly what will happen to your assets if you file, including what will happen to any money that you have invested in your RRSP.

Do I Lose My RRSP if I File for Bankruptcy?

Some of the most common questions and concerns that trustees hear relate to RRSP and bankruptcy filing. The good news is that there are rules in place that prevent people from losing everything they own when they file for bankruptcy. In most cases, you will not lose the money you have invested in your RRSP when you file for bankruptcy.

  • Contributions that were made to a Registered Retirement Savings Plan more than 12 months before your bankruptcy filing are exempt from the bankruptcy process. This means you will not lose these funds.
  • If your retirement savings are “locked in” until you retire (which is the case in many employee pension plans), these assets are also exempt from seizure during the bankruptcy process.
  • Life insurance policies that have a preferred beneficiary (such as a parent, spouse or child of the policyholder) are also exempt.

It is a common misconception that a person who files for bankruptcy will lose everything they own. If you have questions about RRSP and bankruptcy filing, ask the trustee during the consultation. They will give you the information you need to make an informed decision.

Alternatives to RRSP and Bankruptcy Situations

Bankruptcy is not the only option that is available to those who are struggling with debt. While it is possibly the most well-known debt relief option, it is actually the last one considered in most cases. For some people, such as those who are unable to meet their financial commitments and who do not own many assets, bankruptcy may be the right choice. However, there are other options that could be available as well.

When you meet with a trustee, they will review your finances and give you details on all options that are available to you. Trustees must follow a strict code of ethics and one aspect of this code is that they must provide people with information on all possible options, not just the ones they can administrate. While some financial professionals may only give details on the options with which they are the most familiar, trustees are required to explain all possibilities. This will give you all the information you need to make an informed decision.

  • One option that may be available is a consumer proposal. Like a bankruptcy, a consumer proposal is a legal process that is designed to help people resolve their debt issues. When you file a consumer proposal, you receive the same legal protection as you do with a bankruptcy. This means creditors cannot contact you about your debts and they cannot take any collection action or legal action against you. However, there are many differences between a consumer proposal and a bankruptcy.
    • In a consumer proposal, the trustee looks at your financial situation, then prepares an offer to your unsecured creditors. In the vast majority of cases, this offer represents a portion of the debt you owe. If the creditors that are owed the majority of the debt choose to accept the proposal, it becomes binding. Essentially, a consumer proposal creates a situation where you can pay a portion of what you owe and have the rest of the debt eliminated.
    • One of the major differences between a consumer proposal and a bankruptcy is that you do not lose any assets when you file. This means your home, car, furniture, clothing, electronics, etc. are all protected. It also means that you will not lose any money in your RRSP, no matter when this money was contributed. Filing a consumer proposal can be the right option in certain situations. Speaking with a trustee can help you determine if it will work for you.

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