What Happens If You Retire Before Your Debts Have Retired?
Recent headlines indicate that more and more senior citizens are heading into retirement while still in debt. According to credit reporting agency reports, the average debt for consumers aged 65 and older has seen the largest year-over-year increase for any age group. What happens if you retire before your debts have retired? Here are some questions a senior citizen can ask themselves when investigating options for debt resolution:
Can creditors garnishee pension monies?
Yes and no.
While bankruptcy is a way to eliminate your debts, many individuals file an assignment in bankruptcy in order to protect themselves from their creditors. Upon retirement, typically your only source of income is pension monies. If this is the case, you do not have any wages that can be garnisheed. It is very difficult for a creditor to garnishee a pension. If you are unable to pay your debts, your creditors have legal remedies to pursue you for those debts. They can seek a judgement against you in Court and seize your bank accounts. This usually occurs only in extreme cases, so most seniors will not need to file a bankruptcy or Consumer Proposal to protect their income from their creditors.
The Canada Revenue Agency (or CRA) is the exception to this rule. The CRA has collection tools that are not available to everyday creditors, like credit card companies and financial institutions. If you have unpaid tax debts, certain sections of the Income Tax Act provide the CRA with the power to garnishee your Canada Pension Plan (CPP) and Old Age Security (OAS) benefits. Though it is rare, the CRA may garnishee your pension income and freeze bank accounts. They also are able to do so without a Court process. The CRA can also garnishee quarterly GST credit and tax refunds to offset outstanding tax debts owing to them. In the event of significant tax debt and the threat of a pension garnishment, bankruptcy or filing a Consumer Proposal may be an option to provide immediate relief and protect your income.
Are retirement savings protected from creditors?
Yes and no.
During your working career, you may have contributed to RRSPs (Registered Retirement Savings Plans), RRIFs (Registered Retirement Income Funds), LIRAs (Locked-In Retirement Accounts), RPPs (Registered Pension Plans) or DPSPs (Deferred Profit Sharing Plans). Most people rely on these investments to supplement their pension income during retirement.
Pensions are protected from your creditors. Most RRSPs, RRIFs, DPSPs are protected from your creditors as well. These types of retirement savings are also exempt from seizure in a bankruptcy. Some contributions made to pension plans, over and above the minimum mandatory contributions, may be available to your creditors.
There are some exceptions. Any amounts that were invested in RRSPs, RRIFs or DPSPs more than a year prior to seeking bankruptcy protection are exempt from seizure in a bankruptcy or in a Consumer Proposal. Any amounts that were invested in an RRSP, RRIF or DPSP within the twelve months may be accessible in a bankruptcy. There are different laws in each Province that may or may not protect contributions made in the last twelve months. Your retirement savings are yours to keep in a Consumer Proposal.
Is my home at risk?
It’s up to you.
Filing an assignment in bankruptcy or a Consumer Proposal does not necessarily mean that you will lose your home. A certain portion of the equity in your home is protected in a bankruptcy. The exemption amount is considered when determining whether or not you have equity in your home that would be available to your creditors in a bankruptcy or Consumer Proposal. There are other amounts that can be deducted when determining how much non-exempt equity you have in your home. If your home is jointly owned with your spouse (or another person), only your share of the equity is available to your creditors in a bankruptcy or a Consumer Proposal.
Often times, if you no longer have unsecured debts to pay because you have filed an assignment in bankruptcy or if you are only paying a percentage of your debts in a Consumer Proposal, it may be more affordable to keep your home. Your mortgage lender cannot initiate foreclosure proceedings against your home just because you filed an assignment in bankruptcy or a Consumer Proposal.
If you do have equity in your home, over and above the exemption amount you are allowed, this equity is considered an asset in your bankruptcy estate. This still doesn’t mean that you will lose your home. A bankruptcy trustee is required to realize on this asset for the benefit of your creditors. If you would like to keep your home after you file an assignment in bankruptcy, you would be required to pay in your portion of the non-exempt equity into your bankruptcy estate.
Filing a Consumer Proposal allows individual’s to retain their non-exempt assets by making monthly payments over a longer period of time (up to a maximum of five years). Because you have a longer period of time to buyout the non-exempt equity in your home, your monthly payments toward a Consumer Proposal would be lower than the required monthly payments in a bankruptcy.
If you are looking to downsize or you are struggling to make your mortgage payments, you can opt to sell your home while in bankruptcy or after Filing a Consumer Proposal. In a bankruptcy, the non-exempt equity would come to the Trustee for your unsecured creditors and you would be allowed to keep the exemption amount.. In a Consumer Proposal, you could use your share of the home equity to pay off your Consumer Proposal sooner or bank the money while continuing to make your monthly payments into your Consumer Proposal.
When to talk to a professional.
Retirement poses different challenges. If you find yourself saddled with debt that doesn’t seem to go away, it might be time to seek the advice of a professional. A licenced Trustee office, such as MNP, will make sure all of your options are considered and you understand the benefits and risks of all of them. MNP offers a free consultation and can provide some peace of mind.
