When you seek help with debts and you’re at the point of considering bankruptcy, the situation is most likely severe.
So it’s natural that you want to preserve the retirement savings you’ve worked so hard to build.
This article aims to provide some insight into what will happen to your savings and pensions in bankruptcy proceedings.
What happens to my savings in bankruptcy?
First, here are the positives. Some savings plans are protected if you file for bankruptcy.
Typically, the following are exempt from seizure in bankruptcy:
- Registered Retirement Savings Plans (RRSPs)
- Registered Retirement Income Funds (RRIFs)
- Deferred Profit Sharing Plans (DPSPs)
- Locked-in Retirement Accounts (LIRAs)
- Life Income Fund (LIF)
However, the following are not protected in bankruptcy and are seized by your Licensed Insolvency Trustee:
- Registered Education Savings Plans (RESPs) (excluding Alberta)
- Tax-Free Savings Accounts (TFSAs)
Stocks and shares, bonds, mutual funds, and GICs can also be seized in bankruptcy.
There are different regulations depending on where you live. For this reason, discuss the best way to resolve your debts and protect your assets with a trustee.
RRSPs in bankruptcy
It’s crucial to preserve your retirement savings, and the good news is that your RRSP is safe if you go bankrupt.
RRSPs are protected under Canada’s Bankruptcy and Insolvency Act when you declare bankruptcy.
However, in some provinces, the entire value is not protected due to the twelve-month clawback provision, which means you will lose any money you have contributed to your plan in the last twelve months.
Any funds paid into your RRSP before these twelve months are safe.
If you have made contributions in the past twelve months, your trustee will withdraw these funds. If this happens, tax is paid on the withdrawal.
If you want to keep the plan entirely, you may make a payment equal to the value of the RRSP into your bankruptcy estate to essentially repurchase the contributions.
Some provinces allow you to keep the entire RRSP, including all contributions made in the past twelve months.
A Licensed Insolvency Trustee can discuss recent contributions with you and advise on the best route forward.
If your RRSP is attached to a life insurance policy, and the beneficiary is family (a spouse, child, grandchild or parent), the entire amount is exempt from seizure, including contributions you have contributed in the last twelve months.
Transferring savings from your RRSP to another company is not considered a contribution and will not be seized. Bankruptcy can also protect your spousal RRSP.
RRIFs in bankruptcy
A Registered Retirement Income Fund (RRIF) is exempt from seizure if you file for bankruptcy.
You will lose any money you have contributed to your plan in the last twelve months, but any funds paid into your RRIF before this period are safe.
DPSPs in bankruptcy
A Deferred Profit Sharing Plan (DPSP) is exempt from seizure if you file for bankruptcy, except for contributions made in the last year.
LIRAs in bankruptcy
If you’ve ever changed jobs and been part of a pension plan, your pension may have been converted to a Locked-In Retirement Account (LIRA).
You can keep your Locked-In Retirement Accounts (LIRA) if you file for bankruptcy, and your account will be protected.
RESPs in bankruptcy
An RESP is seized in bankruptcy because it can be cashed out at any time, meaning it’s effectively your money until it’s used for your child’s education.
If you want to keep your RESP, you can make a payment equal to the value of the RESP to your trustee to repurchase the RESP.
There is an exception to this rule: If you live in Alberta, you can keep your RESP if you declare bankruptcy.
TFSAs in bankruptcy
A Tax-Free Savings Account (TFSA) is a registered investment or savings account that allows tax-free gains. You can use a TFSA for any savings goal, and withdrawals are tax-free.
TFSA investments are not protected and are seized by the trustee.
If you want to keep your TFSA, you can make a payment equal to the value of the TFSA to your trustee to essentially repurchase it.
RSPs in bankruptcy
A Retirement Savings Plan (RSP) may be protected if life insurance is attached. The beneficiary must be spouse, child, grandchild or parent of the policy owner.
LIFs in bankruptcy
Life Income Fund (LIF) is exempt from seizure if you file for bankruptcy, but any money withdrawn is considered income and will be included when determining if you have surplus income.
If I file bankruptcy can they take my pension?
If you receive any pensions or retirement income, these won’t be affected when you file for bankruptcy, and you will continue to receive them.
The following are protected in bankruptcy:
- Canada Pension Plans (CPP)
- Old Age Security (OAS) pensions
- Registered pension plans (RPPs)
- Guaranteed Income Supplement (GIS)
- Any private pensions
Any pension income is considered when checking whether you have surplus income.
As discussed by Joel Kideckel in his MNP article about bankruptcy and government retirement income, filing for bankruptcy could also stop the CRA from garnishing your CCP income if you owe income tax debt.
What happens to my Registered Disability Savings Plan (RDSP) in bankruptcy?
A Registered Disability Savings Plan (RDSP) is exempt from seizure if you file for bankruptcy.
The RDSP is not exempt from creditors by statute, but a recent British Columbia Supreme Court decision effectively means that creditors cannot seize an RDSP.
Life insurance policies in bankruptcy
You can usually keep term life insurance policies as long as you can continue to make your payments.
Universal life insurance and whole life insurance policies are exempt if the beneficiary is a spouse, child, grandchild or parent.
If your policy isn’t exempt, your trustee will determine whether to cash out the policy, or you can make payments to your trustee for its value.
If you have a non-exempt life insurance policy, a consumer proposal might be a better option.
Rules on savings and pensions in bankruptcy by province or territory
In each province and territory, different rules outline exempt assets in bankruptcy.
Through the Bankruptcy & Insolvency Act and provincial legislation, these exemptions protect some items so that you can maintain a decent standard of living while bankrupt.
A trustee can explain the exemptions that apply to you. The consultation is free, and your trustee will review your assets to determine what would be affected if you file.
Protect more assets with a consumer proposal
If you have assets that aren’t protected in bankruptcy, consider filing a consumer proposal instead.
A consumer proposal doesn’t require you to surrender assets to a trustee. Instead, you agree to pay back your creditors a portion of the debt over a longer period and consolidate your debts into one affordable payment.
You will pay more than you would in bankruptcy, but payments can be spread out over a longer period, up to five years.
Find out more about bankruptcy from a Licensed Insolvency Trustee
If you want to learn more about savings and pensions in bankruptcy, always obtain professional advice from a Licensed Insolvency Trustee.
Arrange a free consultation and bring all the paperwork related to your savings before you meet so your trustee is best placed to provide you with the best advice.
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