How are tax refunds treated in a bankruptcy?

An income tax refund is considered an asset in a bankruptcy in Canada. If you file for bankruptcy, you will automatically lose any tax refund for the year that you file. In addition, if there are any refunds due to you for any prior tax years, they will also be sent to your trustee.

Even if you amend a previously filed return or apply for a disability tax credit for any years up to or including the year you file, you will not receive those refunds (even if your bankruptcy is completed). I have seen numerous occasions where several years after finishing a bankruptcy and receiving a discharge, a person has become eligible to file for a disability tax credit. Canada Revenue Agency (CRA) will send the refunds for the pre-bankruptcy years (including the year of the bankruptcy) to the trustee and send the refund for any years after the bankruptcy to the taxpayer.

How are tax refunds treated in a consumer proposal?

Tax refunds are treated differently when you file a consumer proposal. 

When you file a proposal, you are making a deal with your creditors and one of the benefits to doing this is that you keep all your assets, including your income tax refund. As long as you do not have past owing taxes, you do not lose any tax refunds when you file a consumer proposal.

If you do not owe the CRA any money and are entitled to a large tax refund each year and rely on it to pay specific expenses such as summer camps or car insurance, then you may want to consider filing a consumer proposal to keep your refund.

However, if you have taxes owing to the CRA for any past tax year at the time of filing, things get a little more complicated.

CRA’s position is that they keep any refunds on income earned prior to your date of filing a consumer proposal and offset these refunds against any past debts you owe them.

Because CRA’s practice in this matter has changed in recent years, I’d like to walk through an example to help explain when you keep and when you lose a refund in a consumer proposal if you also owe past taxes to the Canada Revenue Agency.

Let’s assume you file your consumer proposal in February 2022. You have not yet filed your 2021 – or 2022 – income tax returns. When you file your 2021 income taxes in April 2022, CRA will keep any refund to offset any tax debt included in your consumer proposal. When you file your 2022 income taxes, CRA will pro-rate how much refund they will keep and how much they will send to you. They will keep, and offset against your tax debt, 2 months and send to you the remaining 10 months since this refund was related to your post-proposal period.

The same applies to any tax credits or tax benefits you may be entitled to at the time of filing a consumer proposal. In summary, CRA will offset any tax refund or tax credits due to you up to the date of filing your proposal against any tax debt including in your consumer proposal.

Even though a consumer proposal can last up to five years, this is only done for the year that you file your proposal. Any future tax refunds for income earned after your consumer proposal date are yours to keep.

Who files your tax returns in a consumer proposal?

In a bankruptcy, your trustee will prepare and file your income tax return for the year of bankruptcy and any outstanding prior years. If you are to receive any refunds, these will be paid to your trustee and distributed to your creditors.

In a consumer proposal, you are required to file all tax returns. CRA will require you to have filed past tax returns before they are willing to accept a consumer proposal. They may also ask for a commitment that you keep all future filings to date and pay your taxes as they become due.

CERB tax debts and consumer proposals

One of the changes we’ve seen over the past few years is how CERB overpayments are impacting Canadian insolvencies. Many individuals received CERB and CRB payments with little to no taxes taken off during the pandemic. Some Canadians received both CERB and EI payments during the confusion.

If you:

• Owe taxes because you did not have sufficient withholdings at source and subsequent earnings increased your taxable income enough to create a tax liability
• Received notification or a collection letter for CERB ineligibility

you may find yourself with a sudden tax obligation you can’t pay.

A consumer proposal does deal with CRA debts as long as no fraud was involved. If, upon filing your tax return your income was high enough to trigger additional tax payments, this obligation can certainly be included in a consumer proposal. It is also our expectation that the CRA will accept a settlement for CERB repayment in a consumer proposal although this area is still evolving. Each case will likely be assessed on its merit.

If you have returned to work and now expect a refund, talk with your trustee about how these refunds may be offset against your CERB debt in a consumer proposal.

For more information about how your tax refund would be handled in a bankruptcy or consumer proposal, contact us today for a free, confidential consultation.

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In this post I’m going to explain both non-exempt (what you lose) and exempt (what you keep) property in a bankruptcy as well as what happens to your assets in a consumer proposal.

What are non-exempt assets? (What you lose)

After you file for bankruptcy in Canada, some of your assets may be sold to repay money you owe to your creditors. These assets are called non-exempt property. The concept behind non-exempt property is simple: If you have valuable assets and you file for bankruptcy, the value of these assets should be used to pay off some of the debts that will otherwise be forgiven in your personal bankruptcy.

Value means the equity in these assets, after repaying any secured loans or registered liens. For example, if you own a home worth $800,000 and you have a mortgage of $675,000 you have equity in your home of $125,000. It is this equity that will be surrendered, subject to any exemption limits. I’ll explain more about dealing with home equity in a bankruptcy below.

Common items you may need to surrender to the trustee could include:

• A second vehicle
• Valuable artwork, coin collections, jewelry
• Stocks, bonds and investments not protected in a registered account
• Cash in the bank beyond what is reasonable to pay for living costs for a short period
• Equity in your home, subject to specific exemptions I’ll mention below
• A second home or vacation property like a cottage
• An inheritance
• A tax refund on income up to the date of filing

What property is exempt in a bankruptcy? (What you keep)

Bankruptcy is not meant to be punitive which means you do not lose everything even if you declare bankruptcy. Both federal bankruptcy law and provincial exemption laws provide a list of certain assets that are exempt (protected) from seizure by a Licensed Insolvency Trustee.

Federal exemptions are those specifically mentioned in Section 67(1) of the Bankruptcy & Insolvency Act (the BIA or the Act). The BIA says that assets not available to satisfy your creditors include:

• Property held in trust for another person
• Property that is exempt by provincial laws
• GST / HST tax credit payments
• RRSP, RRIF
• The courts have ruled RDSP savings are also exempt under the Act
• Prescribed payments relating to special needs of individuals which the Office of the Superintendent of Bankruptcy has ruled to include CERB, CRB, Child Tax Benefit and HST cheques are not considered income for the purposes of calculating surplus income.

As mentioned, the limitations amounts are based on equity, after any amount owing. Value is also based on resale or liquidation value, what you could reasonably get in a garage sale for example for home furnishings.  The result of this is that in most bankruptcies across Canada, people keep their personal belongings and household furnishings.

Exemptions by province

Each province has its own laws that prohibit the seizure of certain assets. Below is a list of bankruptcy exemptions by province.

• Alberta

  Limitation amounts are set by provincial law, specifically the Civil Enforcement Act and its regulations.

  • Necessary food for 12 months
  • Clothing up to $4,000
  • Household furnishings and appliances up to $4,000
  • One motor vehicle up to $5,000
  • All medical and dental aids
  • Principal residence up to a certain value
  • Tools used to earn an income up to $10,000
  • Farm property (up to 160 acres with conditions)
  • Farming equipment with certain conditions
  • RRSP, RESP, RDSP balances except for unusual contributions
  • Life insurance where beneficiary is spouse, child, parent or grandparent
  • Most pensions are exempt
  • Up to $40,000 in equity in your personal residence (pro-rated for joint ownership).
• British Columbia

  British Columbia limitation amounts are defined in the BC Exemptions Regulation.

  • All clothing
  • Household furnishings and appliances up to $4,000
  • One motor vehicle up to $5,000 ($2,000 if behind on child support)
  • Tools and property necessary for work up to $10,000
  • All medical and dental aids
  • Registered savings plans (RRSP, RRIF) except contributions made in the last 12 months
  • Most pensions and certain life insurance policies are exempt
  • $9,000 equity in your personal residence ($12,000 in Vancouver and Victoria)
• Manitoba

  Limitation amounts are regulated in the Manitoba Executions Act.

  • Necessary food & fuel for 12 months
  • All necessary clothing
  • Furniture and household appliances up to $4,500
  • One motor vehicle up to $3,000 (must be used for business or transportation to work)
  • Tools of the trade up to $7,500
  • Certain farm equipment, livestock, tools, seed stock
  • Up to 160 acres farmland & related buildings
  • All health aids
  • Registered savings plans (RRSP, RRIF, DPSP) except unusual contributions
  • Some pensions
  • $2,500 in home equity ($1,500 if co-owned)
• New Brunswick

  Exempt assets and provincial limits are listed in the Memorials and Executions Act.

  • Food and fuel for 3 months
  • All clothing
  • Furniture, furnishing & appliances up to $5,000
  • Tools used for trade up to $6,500
  • One motor vehicle up to $6,500 if used for work
  • Specifics for farm property including animals, feed and seed
  • All medical & health aids
  • Registered savings plans (RRSP, RRIF) except contributions made in the last 12 months
  • Certain government pensions
• Newfoundland

  Exempted property is listed in the Judgement Enforcement Act with amounts in the regulations.

  • Necessary food and fuel for 12 months
  • Clothing up to $4,000
  • Household furnishings and appliances up to $4,000
  • $500 total exemption for items of sentimental value
  • One motor vehicle up to $2,000
  • Tools of trade or business (including farming, fishing, or aquaculture) up to $10,000
  • Registered savings plans (RRSP, RRIF, RDSP)
  • Up to $10,000 equity in your personal residence
• Nova Scotia

  Exemptions are listed in the Judicature Act with limitation amounts set by regulation.

  • Unlimited food & fuel for family
  • All clothing
  • Household furniture and appliances up to $5,000
  • One motor vehicle up to $6,500
  • All medical and health aids
  • Tools of the trade (including farm equipment, fishing) up to $7,500
  • No limit on feed, seeds, livestock for domestic use
  • Registered savings plans (RRSP, RRIF) except contributions made in the last 12 months
  • Some pensions
• Ontario

  Exempt assets are listed in the Execution Act with amounts set in its Regulations. Please note these amounts are current as of 2021 but are increased annually for inflation.

  • All clothing
  • Household furniture, equipment, food and fuel up to $14,180
  • One motor vehicle up to $7,117
  • Tools to earn a living up to $14,405
  • Up to $31,379 for farming animals and equipment
  • Registered savings plans (RRSP, RRIF) except contributions made in the last 12 months
  • Most other pension plans and certain life insurance policies
  • If your principal residence equity is less than $10,783 it is exempt, otherwise there is no home equity exemption
• Prince Edward Island

  Exemptions and limits are regulated in the Judgment and Execution Act.

  • All clothing
  • Household furniture, equipment, food and fuel up to $2,000
  • One motor vehicle – up to $6,500 if used to get to work, otherwise $3,000
  • All medical and health aids
  • Tools to earn a living up to $2,000
  • Personal property used in farming or fishing up to $5,000
  • Registered savings plans (RRSP, RRIF) except contributions made in the last 12 months
  • Some pensions
• Quebec

  Provincial bankruptcy exemptions are listed in the Code of Civil Procedure. The Quebec government website also lists unseizable property.

  • All food and fuel
  • All clothing
  • Household furniture and appliances up to $7,000
  • One vehicle required for work
  • All farming exempt
  • Registered savings plans (RRSP, RRIF) except contributions made in the last 12 months
  • Certain pensions
  • Equity in personal residence up to $20,000
• Saskatchewan

  Exempted assets are listed in The Enforcement of Money Judgements Act with amounts in the related regulations.

  • Clothing and jewelry up to $7,500
  • All household furniture and appliances
  • One vehicle up to $10,000
  • All tools of the trade
  • Specific exemptions for farmers including livestock, equipment, feed and seed
  • If your home equity is less than $10,000 it is exempt, otherwise there is no home equity exemption
  • Certain pensions and life insurance including DPSPs
  • Up to $50,000 in home equity
• Yukon

  Exemptions are listed in the Yukon Exemptions Act.

  • Food and fuel up to 12 months
  • No limit on clothing
  • Household furniture, utensils and equipment up to $200
  • Animals, books and tools to earn a living up to $600
  • Registered savings plans (RRSP, RRIF) except contributions made in the last 12 months
  • Up to $3,000 equity in your home
• Northwest Territories

  Exempt assets can be found in the NWT Exemptions Act.

  Limitation amounts are set by the territorial Exemptions Act.

  • Food and fuel for 12 months
  • No limit on clothing
  • Household furniture and appliances up to $5,000
  • One vehicle up to $6,000
  • Hunting tools up to $15,000
  • Tools of the trade up to $12,000
  • Registered savings plans (RRSP, RRIF) except contributions made in the last 12 months
  • Equity in principal residence up to $50,000
• Nunavut

  Exemptions are regulated in the Nunavut Consolidation of Exemptions Act.

  • Food and fuel for 12 months
  • Unlimited clothing
  • Unlimited household furniture and appliances
  • All medical and dental aids
  • Unlimited hunting and tools of the trade
  • Up to $35,000 in home equity
  • Registered savings plans (RRSP, RRIF) except contributions made in the last 12 months
  • Certain pensions and life insurance policies

Treatment of home and car

Because secured debts, like your mortgage or car loan, are not included in a bankruptcy, it is important to understand how their rights affect assets you own. It is possible to declare bankruptcy and keep your car. We have also written a more detail article on how bankruptcy affects your house.

How does the treatment of non-exempt assets in bankruptcy compare to a consumer proposal?

A consumer proposal is the most common alternative to personal bankruptcy in Canada. In fact, it is the solution most Canadians use to deal with their debts.

Just like in the case of bankruptcy, a consumer proposal offers debt relief and provides legal protection from creditors. A consumer proposal can stop collection calls, a wage garnishment and lawsuits.

The main difference between the two is that you can keep all your assets with a consumer proposal, including non-exempt assets.

A consumer proposal is a legal agreement to settle your debts for less than you owe, in exchange for which you agree to make pre-arranged payments to pay off the settlement amount. While you do not lose assets in a proposal, the value of your non-exempt assets will affect how much you will need to offer your creditors.

Consumer proposals are much simpler than bankruptcies, and the terms are determined upfront. Your payments can be spread out over a period of up to five years, making your monthly payments more affordable than a bankruptcy if you have significant non-exempt assets you wish to keep.

The goal of filing for bankruptcy, or making a proposal to creditors, is to get debt relief when you reach a point where you can’t pay off what you owe on your own. Bankruptcy is not punitive, but instead it eliminates almost all your unsecured debts and allows you to start fresh

To determine which assets you may keep or lose, or to discuss whether you should file a bankruptcy or consumer proposal, contact us to book a free consultation with a Licensed Insolvency Trustee.

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How you should proceed is based on what you want to do and whether you can afford your ongoing lease payments.

Do you lose your car if you file for bankruptcy?

The good news is you don’t automatically lose your car if you file a bankruptcy or consumer proposal in Canada.

If you financed your car, truck, van or any vehicle with a loan or lease, then when you file for bankruptcy in Canada, you can keep your vehicle as long as you continue to make the monthly payments.

The key here is you must continue with your obligations under the loan or lease agreement. Your lender or leasing company can repossess the vehicle if you don’t keep up with the required payments.

Your creditor can’t demand the vehicle back just because you filed personal bankruptcy. Even if your loan or lease contract contains a clause that says your lender can demand full payment, cancel the lease and take the vehicle back if you become bankrupt, this clause is unenforceable.

Specifically, the Bankruptcy & Insolvency Act provides a stay of proceedings against such actions.

Section 69(2)(b) prohibits secured creditors from taking possession of assets under a security agreement just because you filed insolvency unless:

• They repossessed the vehicle before you filed
• They gave notice of their intention to take possession 10 days before you filed
• You give them permission to take the car back

If you can continue to make your monthly payments, the leasing company, bank or car lender can’t cancel your vehicle lease or demand full payment of your car loan.

What kind of debt is a vehicle lease?

Most people understand that a car loan is a debt, but what about a lease?

A car lease is a financial agreement between you and the car leasing company to pay for the car’s use over a specific period. The car lessor owns the vehicle, and in exchange for the right to use the vehicle, you have fixed monthly payments for the duration of the agreement. Since you legally owe money under contract, you have a debt equivalent to the remaining payments.

When you file for bankruptcy, all your debts need to be listed, so if you have a vehicle lease, you need to notify your trustee.

Most debts in Canada fall under two categories: unsecured and secured. Unsecured debts include credit cards, lines of credit, or payday loans, for example. Vehicle loans, mortgages and any other debts tied to an asset are secured debts.

Vehicle leases are secured debts because the leasing company has a secured interest in the asset. While the debt will be listed on your Statement of Affairs as a secured debt, it is not dischargeable by bankruptcy.

Can you break a vehicle lease or car loan in a bankruptcy?

While you can keep your car if you file insolvency in Canada, that does not mean you should. An expensive car lease payment can be one reason you face debt problems, especially after factoring in other costs of driving, including gas, insurance, and repairs.

You can file bankruptcy in Canada, give up your vehicle voluntarily, terminate the lease and eliminate any remaining obligation for future payments due to the end of the lease term.

There are several reasons why surrendering your leased, or financed vehicle makes sense:

• You can no longer afford the monthly payments.
• You owe more than the car is worth. Longer-term vehicle financing (eight to ten years) has resulted in many Canadians finding their car loan or lease underwater. Facing a debt after your vehicle is no longer serviceable makes no sense.
• You no longer need the vehicle. Working from home during COVID-19 has made many people living in a city like Toronto, for example, rethink ownership of a car entirely.

You can walk away from an auto loan or lease before filing for bankruptcy. You simply return the vehicle to the leasing company but make sure you do it before declaring bankruptcy. The lessor will then be responsible for selling or auctioning the vehicle for fair market value. Any lease payments owing above the sales proceeds become an unsecured debt that can be discharged by bankruptcy.

Always advise your Licensed Insolvency Trustee that you will be surrendering the vehicle.  When reviewing claims filed in your bankruptcy by creditors, the trustee will ensure the debt owing to the leasing company is listed in your bankruptcy as a dischargeable debt.

One vital thing to keep in mind if you decide to break the car lease or loan is that you need to keep up with your insurance payments up until the point you drop the car off. This is because you are still responsible for the car while it’s in your possession, and should something happen to it, you’ll be liable to pay for all damages.

Should you continue to keep your financed car during bankruptcy or not?

Even though it is possible in most cases to keep your car even if you declare bankruptcy, this is not always the best solution. I meet with people every day who are very tied to their vehicles. The decision to buy or keep a car is an emotional one.

However, if you’re experiencing financial problems, you are probably looking for ways to cut your monthly expenses and save money. You are filing insolvency to get rid of overwhelming debt payments. A bankruptcy or proposal should be a fresh start. Keeping your monthly car payment obligation might hold you back.

If you can rely on public transit, it’s worth considering surrendering your car to save the monthly payment and other costs you have with the vehicle. Insurance, gas, parking, maintenance and repairs add up. For those times you need a vehicle, you can always turn to a rental car company.

However, if you can’t do without a car, you may consider surrendering your current vehicle and getting a cheaper car to reduce your monthly costs.

Again, this is best accomplished before filing. It is difficult (although not impossible) to qualify for a car loan while bankrupt, and if you do, lenders that specialize in bad credit car loans charge a very high interest rate. So, find your replacement vehicle, then surrender the car you no longer want, then file insolvency is what we usually recommend. After your bankruptcy is finished, take steps to repair your credit, and you should be able to qualify for a lower interest car loan within a year or two of completion.

What happens to my financed or leased car if I file for a consumer proposal instead?

When you file a consumer proposal instead of bankruptcy, you make a settlement with your creditors to pay back some of the money you owe. You keep all your assets when you opt for a consumer proposal, including your home and vehicle.

Vehicle leases are not affected by filing a consumer proposal, and if you can keep up with your monthly payments, you can carry on with your car lease.

If you want to walk away from your financed vehicle, the same process applies in a consumer proposal in Canada as in a bankruptcy filing. Let your trustee know you will be surrendering your vehicle as part of the proceeding, then contact the lender to let them know that you want to return the car so they can advise you about what to do with it and where to drop it off.

Choosing between filing for bankruptcy or opting for a consumer proposal depends on the personal circumstances. Deciding what to do with your vehicle should always be part of that discussion.

Bottom line

As you can see from above, you can generally keep your leased vehicle when you’re considering bankruptcy or consumer proposal in Canada.

Even though it is mostly up to you whether you want to continue to make payments on your car lease, make sure that you run the numbers multiple times to determine whether keeping the lease makes sense for you financially. If you’re not sure what to do, talk to your Licensed Insolvency Trustee, who can help you make the right money management decision.

The post What Happens to a Financed or Leased Car in Bankruptcy? appeared first on Hoyes, Michalos & Associates Inc..

Jointly-owned property may include a matrimonial home and any equity they have built up, joint ownership in a family vehicle, unregistered savings accounts like a GIC or bank account that are in both spouses’ names, or co-owned registered savings like RESPs.

In a bankruptcy, the Licensed Insolvency Trustee (LIT) is required to realize on all non-exempt assets, which includes the bankrupt’s share in any joint property. Below I explain what happens to various types of joint-owned property and what both the bankrupt and non-bankrupt owners of an asset can do to keep their property while achieving debt relief.

Bankruptcy Impact on Joint Matrimonial Home and Real Estate

While there are specific exemption limit differences between provinces in Canada, in general, bankruptcy law requires the trustee to realize on the equity in your house at the time you file bankruptcy. For simplicity, I’ll use Ontario laws, but the general principal applies to a jointly-owned home no matter where you live in Canada.

In Ontario, the Execution Act states that the debtor’s principal residence is exempt from seizure in a bankruptcy if the debtor’s equity does not exceed $10,000. But if his or her equity exceeds $10,000 in the principal residence, it then becomes subject to seizure. Your Trustee will recommend that you get an appraisal on your home as part of the initial debt assessment to determine how much equity there may be in your house.

What happens if you and your bankrupt spouse own a home with an equity over $20,000?

Consider my example:

Dave is considering filing bankruptcy. Let’s say Dave and Katie own a home worth $350,000. The mortgage on their home is currently $300,000, leaving $50,000 in equity. Based on their legal records, they each own a 50% interest in the home.  That means that, as the bankrupt, Dave has a potential realizable asset in his bankruptcy of $25,000.

To avoid the sale of their home, but to allow Dave to declare bankruptcy, Dave and Katie each have the following options:

• Dave could pay his share of the equity value in the home to the Trustee to satisfy his creditors as part of his bankruptcy payments
• Katie could purchase Dave’s share of the equity from the trustee for fair market value.

If making arrangements to repay Dave’s share of the equity to the trustee is not possible for the husband and wife, then the Trustee can obtain court approval for the partition and sale of the property. This would then force the sale of the property at a court-approved price.

A better alternative in these situations is often to file a consumer proposal rather than a bankruptcy.  A consumer proposal would allow Dave to make a deal with his creditors to repay a portion of what he owes over a period of  up to 5 years, while keeping his interest in the home intact.

Bankruptcy and Joint Home with Ex-Spouse

It’s not uncommon for a separated couple to still own a home together pending formal distribution of the marital assets. If you file bankruptcy during your divorce, but before any divorce or separation agreement is finalized, any assets you own at the time you file are subject to seizure in your bankruptcy including your share of the house even though you are no longer living there. Should you file for bankruptcy, your ex-spouse who currently resides in the home might be affected.

Like my previous example, the impact of bankruptcy on a joint home will all come down to how much equity is available.

If, pending completion of your divorce your ex-spouse lives in the home, your ex-spouse can work with your Trustee to buy out the equity, putting funds in your bankruptcy equivalent to the equity for the benefit your creditors, in exchange for a deed giving them full title to the property.  

If the marital home is being sold as part of the divorce, the Trustee may register a lien on the property for the amount equal to the bankrupt’s share of the equity until a sale is completed.  The lien will result in any sales proceeds being paid to the trustee ahead of the spouse, but after repayment of the mortgage.

As a best practice, during your divorce proceedings, you should explicitly state in your separation agreement that the ex-spouse who will be living in the home is also entitled to all shares of equity in the home. This way, you can avoid future financial problems if one spouse files bankruptcy.

Bankruptcy Impact on Family Owned Vehicle

If you and your spouse own a vehicle outright, with no financing, and both your names are registered on your vehicle ownership, this means the value of the vehicle is split 50/50 between both owners.  In this case, the first thing your trustee will consider is how much the car is worth. In Ontario, bankruptcy exemptions allow a bankrupt an exemption for one motor vehicle up to $6,600. Since you share ownership, if your 50% share of the value of the car is below this amount, the vehicle would not be seized by the trustee.

In the unlikely event your share of the vehicle is worth more than that amount (meaning the vehicle in total could be sold for more than $13,200) you, or your spouse, have the option to “buy out” the difference from the trustee for the satisfaction of your creditors.

If you don’t own the car outright and the vehicle is currently financed, leased, or has a secured charge against it by another creditor, the car will be considered a secured asset and not included in the bankruptcy. You can keep it as long as either you or your spouse stay up-to-date on payments. Should you fall behind on your loan payments, your lender can seize the asset and bankruptcy won’t be able to stop that process.

Bankruptcy Impact on Savings Accounts

Spousal RRSPs

Registered savings like RRSPs and company and government pensions cannot be held jointly. A bankrupt’s pension or RRSP is protected in a bankruptcy under the Ontario Pension Benefits Act which means that the assets cannot be seized except for contributions made in the last 12 months.

Because only contributions made in the last 12 months are subject to seizure in a bankruptcy, this can create a tax implication for the non-bankrupt spouse if they have made spousal contributions in the last year.  In the case of a Spousal RRSP, the spouse is the registered account owner, beneficiary or annuitant. If the annuitant files bankruptcy, any contributions made in the last 12 months will be seized by the trustee.  Tax law in Canada states that if the non-annuitant spouse contributes to the Spousal Plan in the current year or the two prior years, and the annuitant makes a withdrawal, then the amount of the withdrawal will be included in the non-annuitant spouse’s taxable income.

RESPs owned jointly

The only registered savings plan that can be held jointly is an RESP. While the beneficiaries of the plan may be your children, the person who set up the plan, or subscriber, is the plan owner and it is possible to have joint subscribers.  If you and your spouse own a joint RESP, each spouse owns an equal share of the funds in the program.

Currently in Ontario RESPs in a bankruptcy are subject to seizure.  Should one of you file for bankruptcy, the bankrupt or their spouse can “buy back” their seized half from the Trustee either as a lump sum or as part of the bankrupt’s bankruptcy payments.

Bank and savings accounts

It is not uncommon for spouses to share a joint chequing account.  Most people who file bankruptcy do not have significant funds saved in these accounts. In general, the trustee will not pursue seizure of a reasonable amount in a joint bank account if that amount is immediately needed to cover rent, groceries and living costs for a short period of time.

However, legally, joint savings accounts, GICs or other unregistered plans are not protected in a bankruptcy and your Trustee will look to realize on the bankrupt’s 50/50 share in these assets.

Keep Your Jointly-Owned Property with a Consumer Proposal

We often see clients who have a significant amount of equity in their homes and joint savings but not enough to refinance their unsecured debts. In this case, rather than filing a bankruptcy, a consumer proposal is the better debt elimination solution.

A consumer proposal allows you to eliminate up to $250,000 in unsecured debt and has no impact on your joint property whether home equity, vehicle(s), or registered and unregistered savings plans, regardless of their value, so you and your spouse can retain ownership. In exchange for retaining assets, a consumer proposal allows the debtor to make an affordable settlement offer to creditors. Once accepted, the debtor enters into a contract with their creditors to settle the debt owing.

If you or your spouse are facing debt problems and you are concerned about what will happen to your joint property in a bankruptcy, you can speak to a Licensed Insolvency Trustee for a free consultation. We’d be happy to review your specific scenario, provide advice on how your assets are affected and what your best debt relief options.

The post What Happens to Joint Property in a Bankruptcy? appeared first on Hoyes, Michalos & Associates Inc..

While we discuss inheritances and bankruptcy specifically in this podcast, the advice applies to virtually any cash windfall including a cash gift, work bonus or lottery winnings.

What Happens To An Inheritance Before, During, and After Bankruptcy?

According to Section 67 of the Bankruptcy and Insolvency Act (BIA), the property of a bankrupt shall comprise:

All property, wherever situated, of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before their discharge.

It is the ‘may be acquired or devolve’ wording in the BIA that applies to inheritances and windfalls. You become entitled to your inheritance at the time of death, and not when the cash or asset is being distributed to you.  So this same entitlement, or right to the proceeds, becomes an asset in your bankruptcy.

Before Bankruptcy

You must disclose all assets, property and income when you file for bankruptcy. Hiding that fact that you are entitled to inheritance monies is an offence under the BIA. Failing to disclose information about a potential inheritance could result in either a refusal of your bankruptcy discharge or a conditional discharge order requiring you to meet additional terms.

Waiting for a windfall, or possible inheritance, to deal with debt problems isn’t always the best option either. If you have significant debts today, consider talking to a trustee about your options. You may be able to work out a proposal with your creditors, allowing you to keep any monies when they arrive. Your creditors may be willing to accept less, if the inheritance process is long and uncertain.

During Bankruptcy

Under bankruptcy law, any money or property you receive before you are discharged becomes an asset in your bankruptcy.

If you are in the middle of your bankruptcy filing and you become entitled to an inheritance, you must inform your trustee so that the proceeds can be redistributed to your creditors. 

While this may sound like bad news, it could allow you to achieve debt relief sooner.

Below are two options available to you:

1. Cancel the bankruptcy if you inherit more than you owe. If you’re already in a bankruptcy and your inheritance can pay off most or all of your debts, you may be able to cancel your bankruptcy filing altogether and even keep a portion of your windfall. Let’s say you owe $50,000 and you’ve filed for bankruptcy. Three months into your filing, you inherit $100,000. You could repay your creditors in full and then apply to the court to have your bankruptcy annulled. In many cases creditors won’t claim any interest charges on the debt.
2. Switch to a consumer proposal and repay a portion of what you owe. Let’s say you owe $50,000 in debt, you’ve already filed bankruptcy, but you are now entitled to a $40,000 inheritance. Your trustee can help you make a deal with your creditors to pay 90%-100% of your inheritance by switching to a consumer proposal. It would allow you to eliminate your debts quickly and get a fresh financial start. 

After Bankruptcy

This one is pretty simple. If you’ve already been discharged from your bankruptcy, and learn you’re entitled to an inheritance, you don’t need to do anything. The inheritance is yours to keep. 

For more detailed information on how a bankruptcy impacts an inheritance, tune in to today’s podcast or read the full transcript below. 

Additional Resources

• Ontario Bankruptcy Exemptions: Assets You Can Keep
• How Bankruptcy Works for Debtors and Creditors in Canada

FULL TRANSCRIPT – Show 229 Will I Lose My Inheritance in a Bankruptcy?

Doug Hoyes:          If you go bankrupt, you eliminate your debts but you also lose some of your assets. When I explain that to people they often ask me, “So what happens if I get an inheritance while I’m bankrupt?” Good question, and the answer is really easy. You lose it.

                               Section 67 of the Bankruptcy and Insolvency Act says that the property of a bankrupt shall comprise, and I quote, “All property, wherever situated, of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before their discharge.”

                               So it’s pretty clear if you get an inheritance or an inheritance devolves on you before your discharge, you lose it. So what does devolve mean? And is there a difference between getting a small inheritance, say a few thousand dollars, and getting a really big inheritance? And if you have a lot of debts today but you think you might get an inheritance at some point in the future, what should you do?

                               Go bankrupt today and risk losing it or hang in there in the hopes that the inheritance might solve your debt problems in the future. And can you just hide it and hope nobody finds out? Lots of questions, so it’s time for a Technical Tidbits edition of Debt Free in 30, so let’s get started by welcoming back to the show, Ted Michalos, my Hoyes Michalos co-founder and business partner.

                               So Ted, Hoyes Michalos has now been in business for over 20 years.

Ted Michalos:        And you were about to say I look the same as I did 20 years ago?

Doug Hoyes:          Absolutely, absolutely the same. So over that time are inheritances something that people ask you about on a regular basis?

Ted Michalos:        It comes up almost daily, and it’s not because people expect to get an inheritance, it’s because they think they might receive an inheritance. And the discussion that we’re having about inheritances also applies to any kind of windfall. So it could be lottery winnings, a large gift that somebody gives you, anywhere where the income, the money isn’t earned.

Doug Hoyes:          So well any kind of lump sum –

Ted Michalos:        Free money.

Doug Hoyes:          Free money, so an inheritance obviously would fall into that category.

Ted Michalos:        Correct.

Doug Hoyes:          Okay, so what we talk about today, we’re mentioning inheritances but it would apply equally to lottery winnings, anything like that, big gifts you get. So I posed a bunch of questions at the start, so let’s kind of hit them one by one.    

                               So first of all I quoted from Section 67 of The Bankruptcy Act, and I know our listeners love it when I start quoting from the Bankruptcy Act. There’s not more exciting than that. And the quote I read was that you basically lose all property, wherever situated, at the date of bankruptcy, or that may be acquired by or devolve on the –

Ted Michalos:        That’s a great word, isn’t it?

Doug Hoyes:          Devolve – so what does devolve mean?

Ted Michalos:        To pass down.

Doug Hoyes:          Okay, so that’s real simple then. So –

Ted Michalos:        Right, so it’s going to come to you.

Doug Hoyes:          Okay, so let’s talk about that. So based on my experience it can take a long time between when the person dies and you actually get the money, because the assets have to be liquidated. There’s a whole bunch of legal stuff that has to happen.

Ted Michalos:        Probate, all that sort of stuff.

Doug Hoyes:          Probate and so on. So what if my rich relative dies while I’m bankrupt but it’s going to take a long time before I get the money. So let’s say it’s going to take years, and I’ll be discharged from the bankruptcy long before the money actually comes in, because of course a bankruptcy typically lasts for 9 months, 21 months, 36 months, depending on some factors.

                               So if the money’s going to come in a long time after my bankruptcy is finished, do I still lose it?

Ted Michalos:        The short answer is yes. So I mean that’s basically what devolved means. You’ve got a right to something that happened in the bankruptcy; it doesn’t matter that you’re going to receive it in the future. You’ve lost that right. It has passed on to your creditors. And I mean the critical date is the date of death, when were you entitled to receive the money because the individual that bequeathed it to you died?

Doug Hoyes:          Gotcha, so the moment that person dies, it’s my money. And if I’m bankrupt, well it becomes property of the bankruptcy estate. So when the money actually gets paid out is irrelevant; it’s when it devolves, when they happens.

Ted Michalos:        Yeah, use the same analogy for the lottery winnings, because there are people that think I can win the lottery and not claim it. It’s the date that the lottery happened. So it’s when you’re entitled to this money, even though you don’t know what the money is, it’s when you’re entitled to it that’s critical.

Doug Hoyes:          Which is the same way debts work.

Ted Michalos:        Right.

Doug Hoyes:          When you go bankrupt, whatever debts you have on the date of bankruptcy are included in the bankruptcy, whether you know exactly what their amounts are, so it works both ways.

Ted Michalos:        Exactly right, yes.

Doug Hoyes:          Okay, so let’s take a simple case then where someone’s bankrupt for nine months, and which of course is the minimum period of bankruptcy in Canada.

Ted Michalos:        And it’s four out of five bankruptcies.

Doug Hoyes:          And that’s the most common situation. So what happens if they get an inheritance before the bankruptcy, during the bankruptcy or after the bankruptcy? So before a bankruptcy, if you get an inheritance …?

Ted Michalos:        Well, and so if you receive an inheritance before the bankruptcy we have to tell your creditors that you did, and if you’ve already spent the money we have to explain to them where the money went.

Doug Hoyes:          So if I got an inheritance ten years ago –

Ted Michalos:        Nobody cares.

Doug Hoyes:          And yeah, the money’s already been spent; it doesn’t matter. If I got it two weeks ago and it’s sitting in the bank, well then that’s going to be an issue. You’re presumably going to lose it during the bankruptcy.

Ted Michalos:        Well and so let’s say Aunt Millie died two weeks ago, so before you filed the bankruptcy, and so you don’t know that you’re receiving anything yet but you’ve been named in the will. We have to tell people that there’s something coming, even though we don’t know what it is.

Doug Hoyes:          Gotcha, so that’s before the bankruptcy starts. If you get an inheritance, if the person dies during the bankruptcy, I guess we already talked about that. It’s pretty simple.

Ted Michalos:        It devolves to the estate.

Doug Hoyes:          It devolves. And so what if I’m discharged from bankruptcy, and then six months later Aunt Millie dies?

Ted Michalos:        So if your bankruptcy’s been completed, you’re discharged and the money didn’t devolve on you during that time, then it’s yours, free and clear.

Doug Hoyes:          So once you’re discharged, it doesn’t matter what happens, it’s your money.

Ted Michalos:        That’s right, yeah.

Doug Hoyes:          And that’s a really good example of why you want to make sure you get your bankruptcy done.

Ted Michalos:        Exactly right, because you don’t know what the future’s going to hold and there’s no point keeping it open longer than it should be. If you can get out of bankruptcy in nine months and one day – and again, four out five people do – that’s what you want. That’s what everybody wants. The system’s designed to get you a fresh start.

Doug Hoyes:          Complete your duties, get the bankruptcy over, and that way if anything good happens in the future, it’s your money.

Ted Michalos:        Correct.

Doug Hoyes:          Okay, so why don’t I just keep my mouth shut then? If I get an inheritance, it’s not like it’s published in the newspaper or anything – or maybe it is – so I find out that Aunt Millie died while I’m bankrupt. Can I just keep my mouth shut and hopefully nobody finds out and I get to keep the money?

Ted Michalos:        Okay, so the short answer is it’s an offence under the Bankruptcy Act. So effectively what you’re saying is, “I’ll just keep my mouth shut and I’ll break the law.” So you’re using the Bankruptcy Act to get relief from your debts. It’s based on the premise that you’re an honest but unfortunate debtor, that you’re trying to get a fresh start. Well, if you’re starting out with your fresh start by lying or hiding the truth, you’re no longer the honest but unfortunate debtor.

                               And I’ve got to tell you, it’s a small world between the internet and family members and, quite frankly, the newspaper is a good example. We had someone in my Guelph office win a lottery a couple of years ago and she decided not to tell us about it, but they published her name in the papers and one of her creditors called and said, “What do you mean she got to win $75,000?” And so she just made things worse.

Doug Hoyes:          Yeah, so the bottom line is, it’s an offence. You have to disclose your assets; it’s as simple as that.

Ted Michalos:        And it’s a small world; you’re going to get caught.

Doug Hoyes:          Yeah, someone’s going to find out anyway so you might as well just fess up. I remember a case I had a few years ago where the guy had about $50,000 in debt and he couldn’t pay it. His wages were being garnisheed, he came in, went bankrupt. And then two months later he won the office hockey pool. So they all put in some money and he ended up winning, and I think he won something like $5,000.

                               So he understood this whole windfall thing and so he called me up and he said, “Well I won the $5,000. I’ll write you a cheque.” So he wrote me a cheque and I distributed it to all the creditors and that was that. And he wasn’t too fussed about it because he said, “Well, if I had won the money before I went bankrupt I just would’ve used it to pay my creditors anyway so it’s no big deal.”

                               So that was not a big deal for him, but what if I’m bankrupt and I’ve got $50,000 worth of debts and I end up inheriting $100,000, like an amount that is considerable larger than what I even owe? Then what happens?

Ted Michalos:        Well the good news is that at any point in a bankruptcy, if your debts are repaid in full – and in the example you just gave they would be – you apply to the court and have the bankruptcy annulled.

Doug Hoyes:          So let’s go through this scenario then. So I get $ 100,000 and I’ve got $50,000 in debt, so what would happen with the money? How would it work?

Ted Michalos:        Well, so there’s a couple of different options. Option number one is the trustee would simply step into your shoes. They’d seize the money, so the $100,000 would come to your bankruptcy, we’d pay off the debts in full and then you’d have the right to apply to the court to say, “Look, everybody got paid in full. Let’s cancel the bankruptcy.”

Doug Hoyes:          And so what does paid in full mean?

Ted Michalos:        Well, so it means that they – whatever amount they claimed in the bankruptcy they were paid, and then they’re entitled to interest expenses from the date of bankruptcy forward, if they want to claim them. In most cases the creditors don’t.

                               So for instance in the example you said there was $50,000 worth of debt. In most cases the creditors would take that $50,000 and they wouldn’t apply whatever interest they’d been entitled to.

Doug Hoyes:          Okay, so Scenario 1, there’s a bankruptcy, we seize the money, it all gets paid out to the creditors. And if there is money left over then it would be returned back to the original bankrupt.

Ted Michalos:        Correct.

Doug Hoyes:          What’s another option?

Ted Michalos:        Well Option No. 2 would be that you have the right to file a proposal. It may seem a little counter-intuitive in this case. The example might be better if, “I’ve got $50,000 in debts and I inherited $40,000.” You want to talk about that next?

Doug Hoyes:          Sure – no, no, let’s talk about it right now.

Ted Michalos:        Alright, so in that case you could do nothing. The trustee would step in and receive the $40,000 and it’d be the scenario we just talked about. In most cases what we’d do is we’d say, “Look, we’ve got enough money here that you weren’t expecting to receive. Let’s file a proposal and offer the creditors some, in fact most of that money in settlement.” And the reason you do that is to cancel the bankruptcy.

Doug Hoyes:          And so a proposal, explain the mechanics of that, then.

Ted Michalos:        So at any point when a bankrupt, someone who’s said, “I cannot repay any portion of my debts,” decides to file a proposal, which means you are trying to voluntarily repay a portion of your debts, if the creditors agree to the deal that you offer them, the bankruptcy is cancelled and now you’re in a proposal.

                               So in this particular example – and quite frankly I do this one once or twice a year – we generally offer 90% of whatever the inheritance will be up to 100% repayment of the debts so that you get to retain something. Now you’re probably thinking the creditors get all the money in a bankruptcy so why would they settle for less? Because this is a windfall – they know you weren’t expecting the money, they weren’t expecting the money. Everybody is getting some sort of benefit from this and you’re allowed to retain some sort of remembrance of the person that bequeathed it to you, and it’s a win for everybody.

Doug Hoyes:          And so let’s be very specific about that then. So the example you’re giving is, “I’ve got $50,000 in debt and I’ve got a $40,000 inheritance” let’s say. So if you do nothing, then the creditors – the $40,000 will get into the bankruptcy estate, the creditors will get their share of the $40,000.

Ted Michalos:        Correct.

Doug Hoyes:          If you do a proposal and offer $40,000 let’s say, then I guess from the creditors’ point of view, well okay, it’s kind of neutral. I’m getting the $40,000 either way, so why wouldn’t they accept it. It kind of makes sense.

Ted Michalos:        Correct, and they’ll get it faster.

Doug Hoyes:          And they’re going to get it faster. So why do they get it faster in a proposal?

Ted Michalos:        Well, so the proposal, the terms can be as soon as the money is received that the trustee will distribute to the creditors. In a bankruptcy the trustee maybe very well sit on that money until the bankruptcy procedure has been completed, and that can take months, sometimes years.

Doug Hoyes:          Yeah, if you go bankrupt at the beginning of the year, and in every bankruptcy tax returns have to be filed, –

Ted Michalos:        That’s a great example.

Doug Hoyes:          So you go bankrupt in January of let’s say, 2019, we can’t file your 2019 taxes until the spring of 2020.

Ted Michalos:        And they won’t be assessed until the late summer of 2020.

Doug Hoyes:          Yeah, maybe the fall. So maybe it’s the fall of 2020 before the bankruptcy ends, so it could easily take 18 months for a bankruptcy to end and the money to be distributed to the creditors, and that’s in the case of a first-time bankruptcy with no surplus. If there’s surplus, even if it’s a second-time bankruptcy, it can take a lot longer. So if the creditors are faced with well, you can have $40,000 in a month or two in a proposal, or $40,000 in a year or two, kind of a no-brainer.

                               What about the case those where I’ve got $50,000 in debt and I’ve got a $100,000 inheritance, so the creditors are entitled to all their money plus they could claim interest. I think the prescribed rate at the moment is 5%, although that could change. So okay, I’m going to get maybe $50,000, maybe $55,000, whatever the number is. Why would they accept a proposal rather than getting all the money plus interest in a bankruptcy?

Ted Michalos:        Well again, there’s time value of money. They’d like to have it in 30 days rather than like the example we just gave. It could be 18 months, 24 months, whatever. And also again, you’re dealing with human beings; they weren’t expecting to receive any of this money. The inheritance is a windfall for them too; they get it. I’ve never had a creditor turn down one of these offers where we said, “We’re going to file a proposal to cancel the bankruptcy,” so that the individual, the client, receives the benefit of not being in bankruptcy anymore. And that is a real benefit.

Doug Hoyes:          Yeah, and you make the comment about it being a windfall, and that’s actually true because in a lot of cases the creditors take the debt, and when a proposal is filed they send it off to some third-party processing agency. In fact in some cases they actually sell the debt. And so the person who’s bought the debt, the company who’s bought the debt, you know, maybe they were expecting 10ȼ or 20ȼ on the dollar, and now that they find out they’re going to be getting close to 100ȼ, it’s like, “Well yeah, why wouldn’t we accept it?” So it really is a win-win for everybody.

Ted Michalos:        Yes.

Doug Hoyes:          So if I think I’m going to get an inheritance, I don’t know for sure but in our example of poor Aunt Millie, she’s kind of sick. So should I just – instead of going bankrupt, automatically go to the proposal option right off the bat?

Ted Michalos:        Yeah, I don’t generally advise that. One, because it means that you’re sitting around hoping ill will on Aunt Millie. And you don’t want your last few months with Aunt Millie to be like that, and quite frankly Aunt Millie would surprise you and stick around for a long time.

Doug Hoyes:          Well, and what if it’s a care where yeah, I don’t expect she’s going to die.

Ted Michalos:        Right, you just know you’ve been named in the will?

Doug Hoyes:          Yeah, I know that there will be some money there, so I guess the answer is well, yeah, do a proposal if it would otherwise made sense. But don’t be doing something, you know, either a proposal or a bankruptcy like you say, well, because I expect this particular thing that will happen, which is highly uncertain.

Ted Michalos:        Right, unless you’ve got a crystal ball or you’re planning to push Aunt Millie off the train. I think there’s a movie there somewhere.

Doug Hoyes:          Again, we don’t advise – nobody take strains anymore anyway. So what is Form 79 and what is Question 12, and why is that in my script here? What is this all about here?

Ted Michalos:        So the common name for Form 79 is called the Statement of Affairs.

Doug Hoyes:          I actually knew that, I was just playing along.

Ted Michalos:        I know you know that, but this for [you] people. Yeah, right, right, yeah. Do you know what it looks like?

Doug Hoyes:          I do! I do know what it looks like, and I know what Question 12 says, and there’s a whole bunch of questions you have to answer; you have to swear to them. And so Question 12 says do you expect to receive any sums of money that are not related to your normal income or any other property within the next 12 months? What’s that all about?

Ted Michalos:        Right, so what they’re basically saying is are you already aware that there’s something unusual going to happen? They’re not necessarily declaring this to be a windfall. So let’s say you work for an employer that gives quarterly performance bonuses and you usually get $1,000, but you know that the company has merged with a different firm and they’re going to do a one-time payout in six months as an extraordinary event. Well that would be something that you’re aware of; there’s a high degree of certainty it’s going to happen and you need to disclose it.

                               Being named in Aunt Millie’s will – we’ll keep picking on Aunt Millie – unless Aunt Millie has been diagnosed with something terminal and the prognosis is really bad, there’s a high certainty you’re going to receive it, we wouldn’t disclose that.

Doug Hoyes:          Yeah, and forget the difference. And even if there is, well you don’t know how much you’re going to get, you don’t know what the costs are. I mean until it’s done, it’s done, so that question relates to something that you’re pretty sure is going to happen. There has to be a high degree of certainty.

                               Okay, so let’s flip this around now, because we’ve been talking about people who have debts. What if you’re the rich guy and you have, let’s say, a son, a daughter, some other heir who –

Ted Michalos:        A nephew perhaps?

Doug Hoyes:          A nephew, let’s say, who’s named in your will and you’re planning to leave them a bunch of money, and yet you know that they’re in serious financial trouble and they’ve said to you, “Hey Uncle Ted, I’m planning to go bankrupt.” So you don’t want to have them in your will and die tomorrow, and then all this money just goes into the pot for their creditors I assume. So what steps can you take as the rich guy – or not even the rich guy – I mean we had this –

Ted Michalos:        Whoever they are.

Doug Hoyes:          Yeah, we have this case all the time where, “Well, you know, my father has $30,000. There’s three kids, we’re each going to get $10,000 when he dies.” Maybe that’s the payout from his life insurance or whatever. Is there something that that person should be doing to eliminate the chance that this money just gets distributed to the creditors?

Ted Michalos:        Well so the first decision the person in financial difficulty has to make is are they going to tell the rest of their family members or any of these potential people that might have them named in the will that they’re in trouble, because the person with the money, the person who’s drafting the will, isn’t filing bankruptcy or isn’t filing a proposal. So they’re free to do whatever they want with their will.

                               So they could simply write you out of it or they could create a familial trust and stick your name in it there. I mean there are lots of different ways that they can handle it, and they’re free to do whatever they like. Now they can even wait until after you file the bankruptcy or the proposal. Good guess – again, they’re not bankrupt, they’re not restricted in any way. So generally speaking, again, unless there’s high expectation that money is going to be received because a death or something is imminent, I don’t think it influences the decision of the person filing the bankruptcy, you’ve just got to decide how much information you’re going to share with your family.

Doug Hoyes:          Yeah, and you made the key point there. It’s your will. You can do whatever you want, you can leave money to whoever you want. So if you decide well, I’m going to leave it to this person and not to that person, then you can do that. You can always change your will again. “Oh, the bankruptcy is over now and I didn’t die, great.” Well now I put them back into the will. It’s entirely your choice.

                               My advice in a situation like that, particularly if you’ve got a lot of money, is get some legal advice.

Ted Michalos:        Always, because we’re not lawyers.

Doug Hoyes:          Yeah, we’re not lawyers. And creating a familial trust, well that’s way beyond the scope of this podcast to be explaining how that’s supposed to work. So if you’re in a situation like that, get some good advice.

                               Okay, so to wrap up the show then, what is your general advice to someone who thinks they may at some point in the future get a lump sum of money, whether it’s an inheritance, a bonus or whatever, and they have debts now. How do they think through what they should be doing?

Ted Michalos:        Well, so the first question they have to answer is how certain are you that you are going to get that lump sum of money? So if you’re telling me that you’re name in Aunt Millie’s will, and Aunt Millie’s doing fine but you know she’s got lots and lots of money, I would say that’s very good for your future but you can’t count on that now.

Doug Hoyes:          And it would be the same for a bonus that, “Well, the company’s been doing well and I might get a $2,000 bonus, I might get a $5,000 bonus in six months, I don’t know.”

Ted Michalos:        Shares in this business that somebody’s talking about buying but it’s never happened, yeah. Unless you’ve got a really high degree of certainty you can’t count on it. Buying a lottery ticket is not a financial plan, we’ll just leave it at that.

Doug Hoyes:          Right, I’m also not in favour of that but –

Ted Michalos:        It’s another form of taxation; it’s a different show.

Doug Hoyes:          Yes, a different show, different show. So your general advice then is if you’ve got a bunch of debts, don’t be focusing too much on what may or may not happen.

Ted Michalos:        Once of the most difficult things with dealing with debts is actually acknowledging that you have a problem. And so by thinking that, you know, six months, a year, two years from now, Aunt Millie’s going to bail me out, you’re really not dealing with the problem. You have to be wide-eyed, you have to look at it clearly and say, “I have an issue now that I have to deal with,” and understand that if Aunt Millie’s money shows up, there are options.

                               We can change the situation that you’re in. Your solution can be modified but right now you’ve got to deal with it the best that you can personally. Don’t put it off.

Doug Hoyes:          And that’s why a lot of people end up filing proposals because, “Well okay, I can afford to make an offer to my creditors now based on what my income is now, based on what my circumstances are. And if things get better in the future, great, then I can pay the proposal off quicker.”

Ted Michalos:        That’s right.

Doug Hoyes:          If they don’t, it’s still a perfectly good option.

Ted Michalos:        That’s right.

Doug Hoyes:          Excellent, well that’s a great way to end it. Ted, thanks for being on the show today. That is our show for today. As always you can find a full transcript and links to everything we talked about today in the show notes at Hoyes.com. That’s H-o-y-e-s.com. Please subscribe wherever you get your podcasts and be sure to check out our Debt Free in 30 channel on YouTube.

The post Will I Lose My Inheritance in a Bankruptcy? appeared first on Hoyes, Michalos & Associates Inc..

Bankruptcy Exemptions in Ontario:

For individuals, the following are exempt from forced seizure in a bankruptcy:

1. All necessary clothing for you and your dependents with no dollar limit
2. Household furnishing and appliances up to $14,180
3. Tools and property used to earn a living to a maximum of $14,405
4. One motor vehicle not exceeding a value of $7,117
5. Equity in your home if that amount is less than $10,783
6. RRSP and RRIF savings, except contributions made within the last 12 months

It is important to understand that the prescribed limits set out by Ontario law are based on resale value on an as-is basis. Your work tools for example are likely used, and have wear and tear. For bankruptcy purposes, they are valued based on what they would sell for as-is, not based on replacement value.

The same valuation applies to your vehicle. You can keep one vehicle (a car or truck), up to the set value limit. This is based on what you could sell the car for. The trustee will usually use the black book value to estimate the value of your vehicle and determine if it is exempt.

Read Transcript

It is still possible to keep your car, truck, work tools, and other assets valued over any exemption limit. You can make an arrangement to ‘buy back’ the value over any exemption limit from the trustee. This amount is added to the cost of your bankruptcy.

Questions About Bankruptcy and Exempt Assets

What happens to my wages in bankruptcy?

You keep your wages in a bankruptcy. You will be required to submit proof of income and expenses monthly to your trustee. Your trustee will use this to determine your average net income for the purposes of calculating “surplus income”. If your income exceeds the government set threshold limit, you will be required to make surplus income payments during your bankruptcy. If your wages are being garnisheed, bankruptcy will stop most garnishments.

Can I keep my bank account if I’m bankrupt?

We strongly advise anyone considering bankruptcy to open a new bank account at a different bank prior to declaring bankruptcy. This will avoid the risk of your bank seizing funds for unpaid debts once you file.

While any funds in your bank account are not exempt assets, typically you are allowed to keep a small amount of cash on hand in your new bank account to cover living expenses like rent, food, etc. for a short period of time.

What happens to my tax refunds?

Your licensed insolvency trustee will file two tax returns for the year that you declared bankruptcy:

• a pre-bankruptcy return (Jan 1 – day before bankruptcy)
• a post-bankruptcy return (date of bankruptcy – Dec 31)

Any tax refunds applicable to the date of bankruptcy and on your post-bankruptcy return will be sent to the trustee. Any taxes owing on your pre-bankruptcy return are included in your bankruptcy. Any taxes owing on your post-bankruptcy return must be paid by you. While you lose your income tax refunds, you keep your HST cheques and Child Tax Benefits.

Can I keep my leased vehicle?

Leased vehicles are treated differently than owned vehicles. Technically you do not own your leased car. You have the right to use the car in exchange for your obligation to make lease payments. If your lease payments are current, you can keep your car, no matter the value. You can, if you prefer, also surrender your leased vehicle and include any shortfall debt as a debt to be eliminated in your bankruptcy. This is a good option if you can’t afford your lease payments.

Can I keep my house if I file bankruptcy?

In Ontario, you keep your house in bankruptcy unconditionally if the equity in your home is under $10,783 and your mortgage payments are current. Above that amount, you can arrange to buy back the equity in your home.

What happens to my RRSP in a bankruptcy?

You keep all RRSP, RRIF and DPSP (Deferred Profit Sharing Plan) savings except contributions made in the 12 months before your bankruptcy. RESP, TFSA and other investment savings are not exempt.  Read more about this asset in our post: RRSP and bankruptcy law in Canada

What about lottery winnings, inheritances and other windfalls?

Inheritances received, or due to you, as a result of the death of someone during bankruptcy become an asset of the bankruptcy.

Lottery winnings and similar windfalls received during your bankruptcy also vest in the trustee for the benefit of your creditors.

Bonuses and commissions from employment would be considered income and not subject to seizure by the trustee however they will impact the calculation of surplus income.

File a Consumer Proposal and Keep Everything

If you have assets that may be subject to seizure in a bankruptcy because they are not exempt, or because their value exceeds the permitted exemption limits, you may want to consider a consumer proposal as an alternative to bankruptcy.

One of the primary benefits of a consumer proposal is that you keep all your assets. As a negotiated settlement arrangement, you make payments to repay a portion of your debt.  Your creditors receive the value of these payments, you keep what you own.

You Don’t Lose Everything

The most important thing to realize is that you do not lose all your assets if you file bankruptcy in Canada. If you do have assets that must be surrendered to the trustee, you still have options like a consumer proposal to keep those assets.

To discuss your specific situation, contact us to talk to a Licensed Insolvency Trustee about how your assets may be treated in a bankruptcy and if a consumer proposal is a better way to preserve any assets you may wish to keep.

The post Ontario Bankruptcy Exemptions: Assets You Can Keep appeared first on Hoyes, Michalos & Associates Inc..

Can I Keep My Home if I File a Consumer Proposal?

Yes. One of the key benefits of a consumer proposal is your assets are protected, which means you keep your assets while achieving debt relief. This includes any equity you have in your home.

When you file a consumer proposal, you are working with a Licensed Insolvency Trustee to create a plan to pay off your unsecured debts, such as credit cards, payday loans, and income tax debt. Any equity value in your home will be taken into consideration when calculating how much you should offer. This is because if you were to file bankruptcy any equity would be forfeited to your creditors. However, with a proposal you keep your home and repay the creditors an equivalent home equity amount over a period of time.

Keep Your Mortgage Payments Current

It’s also important to understand that a consumer proposal does not affect secured debt like your mortgage. You will be required to keep making your mortgage payments regularly and on-time. Failure to do so would result in your mortgage lender acting to seize your home due to mortgage arrears.

Moreover, under current laws, a lender is not allowed to cancel a mortgage just because you have filed for bankruptcy or a consumer proposal, if your payments are on time.

Will a Consumer Proposal Impact my Mortgage Renewal?

If your mortgage payments are current and on-time, you should be able to renew your mortgage with your existing lender while you are in a consumer proposal filing. The reason for this is your existing lender usually will not require a new credit application. However, filing a consumer proposal will impact your credit rating. In very rare circumstances, this may affect your ability to renew your mortgage at preferred rates. A lot will depend on your loan-to-value ratio, debt-to-income ratio and personal credit payment history.

Should you decide to switch lenders, or refinance your mortgage, you would need to file a new credit application. Your lowered credit rating would then be under consideration. In this case, it may be a challenge to renew with a new lender at your preferred mortgage terms. They may consider you a lending risk and have you refinance at a higher interest rate or possibly deny refinancing altogether.

Based on our experience, unless you decide to renew your mortgage with a new lender and therefore file a new credit application, a consumer proposal filing should still allow you to renew your mortgage with your existing bank in most cases.

Will a Consumer Proposal Filing Prevent me from Buying a Home?

A consumer proposal does not prevent you from buying a home in the future. While your proposal will appear on your credit report for a short period, there are steps you can take to rebuild your credit and prepare for a successful mortgage application.

As with any mortgage application, your chances of approval are increased if you have a significant down payment already (20% or higher) and a stable income.

In addition, here are some steps you can take to improve your ability to qualify for a mortgage after you have completed your proposal.

Qualifying for a mortgage after a consumer proposal

Because a consumer proposal allows you to lower your monthly debt payments, often quite significantly, now is the time to start building some savings. Consider creating a budgeting plan and direct your savings in debt payments towards a goal like saving for a down payment towards a new home and/or having a stable emergency fund. You should also make it a habit to pay all your bills in full and on-time to build a solid credit history during and after your consumer proposal filing.

Traditional lenders will look for the following in order to be approved for a prime quality mortgage after filing a consumer proposal:

• A two-year timeline after discharge, over which you have re-established a new, better, credit rating;
• Two or more new credit facilities (like a line of credit or a small bank visa); and
• Approximately $2500 in new credit.

While this process requires some patience and discipline, it’s in your best interest to build a large down payment and consistently pay all your bills. This way, you can rebuild your credit rating to qualify for a mortgage at an affordable rate. You can learn more about what you need to do to qualify for a mortgage after filing for insolvency.

What if my spouse has great credit, and only I’m filing a consumer proposal?

If you are planning to buy a home and your spouse has good credit, he or she could apply for the mortgage loan and have you join as a co-signer, if required.

If you’re already a homeowner, and just you or your spouse files a consumer proposal, or you file one jointly, your mortgage will not be affected as long as you are making its payments.

We understand you may have a lot of questions about how a consumer proposal filing affects home ownership. As each situation is unique, our debt relief professionals are more than happy to review your finances, answer your questions, and help you determine whether a consumer proposal is the right solution for you.

The post Does a Consumer Proposal Affect my House and Mortgage? appeared first on Hoyes, Michalos & Associates Inc..

Ontario introduced exemption laws around home equity in 2015 that mean that you will not lose your home in a bankruptcy if the equity is $10,000 or less.

If the equity in your home is above $10,000 however, how you proceed will depend on how deep in debt you are, what kind of debts you have and whether or not your mortgage is under water.

Is Your House Mortgage Current?

The first step in keeping your home when you file bankruptcy is making sure you are current on your mortgage payments. While you do not necessarily lose your home if you file for bankruptcy, if you are in arrears on your mortgage your lender will eventually take action to repossess your house. Secured loans like your mortgage are not included in either a bankruptcy or consumer proposal. That means you can’t obtain protection from your mortgage lender under Canadian bankruptcy law for mortgage arrears.

So before you do anything else, catch up on your mortgage payments.

Now you have options you can look at that will deal with the remainder of your debt, without the threat of foreclosure on your home.

How Much Can You Afford To Pay to Get Out of Debt?

When choosing the best way to plan your way out of debt, you have to ask yourself what you can afford to pay.  There are options that work if you are able to pay your debts in full.  Then, there are the options for when you cannot repay your debts completely.

Paying Back Your Debts in Full

For some people, the right choice is to utilize the accumulated equity in their house to consolidate other debts into a more manageable monthly payment.  This could take the form of a secured line of credit, a second mortgage, or even a new mortgage with a brand new amortization period.

This is a conversation you have with your bank or mortgage lender.  With the changes to mortgage rules in the recent past, financial institutions are limited to lending you 80% of the assessed value of your house.  For example, you could refinance with a total mortgage balance of up to $240,000 if your home is assessed at a value of $300,000. This option works if you have sufficient equity in your home to take care of all your outstanding unsecured debts. In addition to being able to offer your home as collateral, you will also need a reasonably good credit history. If your mortgage and other debts are in arrears, you may not qualify for this type of debt consolidation loan.

So what if the bank isn’t able to help you because you don’t have enough equity or good credit to refinance your debts?

A credit counselling agency may be able to help you with a Debt Management Plan. Your credit counsellor will work with you and your creditor to develop a debt repayment plan for your debts. The amount of equity in your home does not have a direct impact on the amount to be repaid.  In a DMP, the full principal amount of the debt must be repaid, but you may be able to negotiate a reduced interest rate.

Paying Back A Portion of Your Debts

If you can’t afford to pay back all of your debt, you can look to the solutions provided under the Bankruptcy & Insolvency Act.

When filing personal bankruptcy with a Licensed Insolvency Trustee and want to keep your house, you need to work out a payment plan to pay for that equity within a reasonable time period.  If you fail to make the payments, your trustee is forced to sell your house to realize on the equity for your creditors.

A Consumer Proposal would likely be a better choice to get out of debt if you want to keep your home.  Like a bankruptcy, a proposal is filed with a Licensed Insolvency Trustee.  In a proposal, you offer to repay a portion of your debts. The big advantage of a proposal is that your trustee never has the duty or responsibility to sell your home or other possessions. Instead, you negotiate a repayment amount with your creditors. They will expect to receive as much, or slightly more than, they would in a bankruptcy which means you will have to ‘buy out’ your equity over the term of your proposal.

Why is this different then than a debt management plan? Because you can include more than just credit card debt and, if your debts total more than the equity in your home, you can make an arrangement to pay back less than you owe.

In Short

Keep in mind that any option where you are not repaying your debts in full is going to hurt your credit rating. That’s why most people, before contacting a trustee, first take time to determine if they can pay back their debts on their own first.

If you cannot pay back your debts in full, it is possible to keep your home even if you file bankruptcy or a consumer proposal. Contact us to book a free consultation with a Licensed Insolvency Trustee so we can help you find out how and still get out of debt sooner.

The post How Do I Get Out Of Debt Without Losing My Home? appeared first on Hoyes, Michalos & Associates Inc..

To help you understand how to maintain your assets during a consumer proposal filing, we’ve provided a detailed guide below.

How a Consumer Proposal affects your house and mortgage

When you file a consumer proposal, you can keep your home as long as you continue to make monthly mortgage payments.

A mortgage lender cannot foreclose on your home unless you are behind on your payments. They also cannot change the terms of your mortgage just because you filed a consumer proposal.

Renewing or switching a mortgage

It is usually possible to renew a mortgage during a consumer proposal with your existing lender if you have a good payment history with them, meaning all your mortgage payments are current.

Switching lenders during the consumer proposal process can be much more challenging because it becomes a new application. Filing a proposal may affect your approval with a new lender and may result in a higher interest rate if you try to refinance.

Over-mortgaged or downsizing

One of the steps taken by your licensed insolvency trustee is a full review of your assets, liabilities, income and expenses.  If, during this review,  you realize your financial problems stem from the fact that you can no longer afford mortgage payments, you may decide that it is best to sell your home and down-size.

If your house is over mortgaged, you can stop paying the mortgage and hand back the home to the secured lender for sale. Any shortfall would be included, and forgiven, as an unsecured claim in your proposal.

We strongly recommend that you surrender the house or move before you file, so that you have no issues finding a place to rent, and so that there is no dispute as to whether or not you are liable for the shortfall.

How a Consumer Proposal affects your vehicle, car loan or lease.

In a bankruptcy, you can keep one motor vehicle worth up to a certain dollar amount set by the government.  In Ontario, the vehicle exemption rate as of 2021 is $7,117.  If the value of your owned vehicle exceeds this amount, you would have to purchase back any additional equity from the trustee in a bankruptcy to keep your car.  If you owned two vehicles, then your second owned vehicle would become an asset that you would have to surrender in a bankruptcy.

In a consumer proposal you can keep all owned vehicles, regardless of their value.

Similarly, if you want to, you can keep any leased or financed vehicle in a consumer proposal.

Because a consumer proposal does not include secured debt, such as a car loan or lease, you can keep any leased or financed car (assuming the equity is less than $6,600) if your loan payments are up-to-date, and you continue to make all your car payments.  If you miss any payments however your secured lender will act to repossess the vehicle.

Cancelling a car lease

What happens if you have an expensive car lease and don’t want to continue making payments on it? In this case you have the option to cancel the lease as part of your proposal. Any amount you owe as a result of the cancellation will be included as an unsecured debt in your proposal filing. You must surrender the vehicle prior to filing a consumer proposal for any shortfall to be included as a dischargeable debt in your proposal.

RRSPs, RESPs, and Investments

Under bankruptcy law, an RRSP cannot be seized by a licensed insolvency trustee except for contributions made in the last year. In a consumer proposal, even those contributions are yours to keep.

In a bankruptcy, RESPs and other investments are assets that you would have to hand over to a trustee. But with a consumer proposal, you can keep these assets too.

This Seems Too Easy: I Get to Keep My Assets with No Cost?

A consumer proposal is a negotiated debt settlement offer made between you and your creditors with the help of a licensed insolvency trustee.  As part of your debt assessment, your Hoyes Michalos Consumer Proposal Administrator will calculate any equity (or value) you have in your house, car or investments, and will ensure that the proposal you offer will be greater than the value of those assets. A creditor is willing to accept a proposal if they feel they are receiving more than they would expect in a bankruptcy, however in a proposal you pay the value of those assets to your creditors over a period of time instead of surrendering the assets to the trustee.

For example, if you have $10,000 in equity in your house and that’s your only asset, a viable proposal might be $200 per month for 60 months, or $12,000. With that proposal, the creditors are happy because they received more than the $10,000 they would have received if you had declared bankruptcy and the trustee sold your house.

This agreement is also beneficial to you because you can keep your house and only pay $200 per month in your proposal to become debt free.

As you can see a consumer proposal in Ontario provides an alternative to bankruptcy that allows you to eliminate your debt while keeping all your assets.

A consumer proposal might be the right debt relief solution, if you meet these requirements:

• You’re able to pay a portion of your debts
• Your debts are greater than the value of what you own
• Your unsecured debt doesn’t exceed $250,000
• You’re able to make monthly payments or one lump sum

We realize that understanding if you qualify for a consumer proposal can be confusing. That’s why our licensed debt professionals want to help. We’d be happy to discuss your financial situation and help you determine whether you qualify for a consumer proposal. Contact us today for a free, confidential consultation.

The post Keep Your Assets with a Consumer Proposal appeared first on Hoyes, Michalos & Associates Inc..

Many people are worried that if they file personal bankruptcy they will lose their RRSP and other pension savings.

In Canada, most Registered Retirement Savings Plans (RRSPs) are protected in bankruptcy and so, in general, you can keep your RRSP savings after filing bankruptcy.

The Bankruptcy and Insolvency Act (BIA) under section 67 (1) (b.3) exempts RRSPs from seizure for your creditors except for any contributions made within the last 12 months.

The BIA also states that creditors are not entitled to any assets that are exempt from execution or seizure by provincial law. In Ontario:

• A Registered Pension Plan is governed by the Ontario Pension Benefits Act is exempt from seizure in a bankruptcy. Ontario protects company-sponsored or government-sponsored registered pension plans (RPPs). All pension assets under these plans are protected, regardless of when the contribution was made. Both employer and employee contributions are safe from seizure.
• The Insurance Act of Ontario protects RSPs that have a life insurance component if the beneficiary is a spouse, parent, child, or grandchild. In this case, all contributions are safe.

Let’s look at three common examples:

Example 1: Your employer takes 5% of your pay and puts it in a registered company pension. All contributions are yours to keep, even those made within the last year and those matched by your employer.

Example 2: You have a Registered Retirement Plan with an insurance component with a company such as Sun Life and your spouse is a beneficiary. These plans are yours to keep, including contributions made in the last year.

Example 3: You contribute 3% of your pay every payday to your own individual RRSP through an automatic savings program. Contributions made to your RRSP in the last 12 months before filing bankruptcy are at risk of seizure by the trustee.

Download our free PDF guide: How Does Bankruptcy Affect Registered Savings Accounts & RRSPs

Trustee has same rights as plan holder

The trustee cannot be granted any more rights to assets in the plan than the plan holder, including for recent payments. If the plan contains terms that prevent the plan holder from requesting payment until a specific event such as termination, death, or retirement, the trustee is not entitled to seize what the plan holder cannot withdraw.

What about transfers between RRSPs?

A transfer is not the same as a contribution. If you transfer funds from one RRSP to another company, then these are not new contributions in the last 12 months and as such cannot be seized by your trustee.

What about a spousal RRSP and bankruptcy?

The BIA applies to RRSPs you own and control. If you file bankruptcy, contributions you made to your spousal plan are not subject to seizure by the trustee. If your wife goes bankrupt, the maximum exposure for her spousal RRSP is the contributions you made in the last 12 months.

What about a RRIF and bankruptcy?

A Registered Retirement Income Fund (RRIF) is treated the same as an RRSP. Normally individuals withdrawing funds from a RIF are not making current contributions, however if they do, their maximum exposure is contributions made within the past 12 months.

Read Transcript

What about an RDSP?

While there is no specific provision in the BIA to deal with a Registered Disability Savings Plan (RDSP), a recent British Columbia Supreme Court ruling held that funds in a RDSP cannot be seized by a Licensed Insolvency Trustee in a bankruptcy for the benefit of creditors.

What happens to a DPSP and bankruptcy?

A Deferred Profit Sharing Plan (DPSP) is treated the same as an RRSP in a bankruptcy. The maximum exposure is any contributions made in the last 12 months. Most DPSP plans have terms that the employee cannot withdraw these funds while still an employee for that company, therefore the full amount in the DPSP could be protected.

Locked-in pension plans

Pension plans that are designated as a Locked-In Registered Plan are exempt from bankruptcy or seizure. The trustee has no entitlement to money in this plan, including recent contributions.

What about TFSA and bankruptcy?

While a Tax-Free Savings Account (TFSA) is a registered savings vehicle, it is not a RRSP and as such is subject to seizure.

What happens to an RESP if I file bankruptcy?

Because the plan holder (usually the parent) can cash out a Registered Education Savings Plan (RESP) at any time, an RESP is considered to be an asset of the plan-holder. Therefore, if the plan-holder is bankrupt, an RESP is subject to seizure by the trustee.

Tips to protect at risk assets even if you go bankrupt

In truth, most people who are considering personal bankruptcy have ceased to make any contributions to their RRSP because they are using most of their income to make debt payments. However, if you do have exposure to recent contributions here is how we advise clients.

Our first step is to review your RRSP documents to determine how much you have contributed in the last 12 months. If you contribute through your paycheque at work we can generally get this information from your paystub. If you have an RRSP through a bank or investment advisor, they will provide a statement.

If you have made no contributions in the last 12 months, no further action is required; you can keep your RRSP.

If  you have made contributions in the last 12 months or have other seizable assets like RESPs, you have three options:

1. You may request that the trustee contact the bank or investment company and withdraw the contributions from the prior 12 months. It is the trustee’s responsibility to pay the tax owing on that withdrawal, so you have no further costs or obligations.
2. You may decide to contribute an extra amount to your bankruptcy to “buy back” your RRSP contributions for the last 12 months. For example, if you have contributed $1,000 and you are in a 30% tax bracket, the trustee would recover a net amount of $700; so you could pay the trustee an extra $700 and keep the full amount of your RRSP.  The same applies to any assets you have in an RESP or TFSA. A payment plan matching the term of the bankruptcy can be arranged.
3. If you have significant seizable assets, you could decide to file a consumer proposal. In a consumer proposal you don’t lose your RRSP or any assets.

As a final planning point, if you are not worried about having your wages garnisheed, you could stop contributing to your RRSP now while you catch up on rent, utilities or other current bills, so that contributions in the last 12 months are reduced.

Protect your retirement from bankruptcy

One of the most common, and costly, financial mistakes we see is people who drain their RRSP savings to keep up with debt payments when they are in financial trouble.

If you have significant debts, draining your RRSP (a protected asset) to fund debt obligations only serves to delay the inevitable. You should not use your RRSP savings to pay down debt without first speaking with a Licensed Insolvency Trustee about your options. Since RRSPs are protected in a bankruptcy, it makes sense to preserve these funds for your retirement.

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