Financial stability can be a concern for many people, especially those approaching retirement. With an increasing number of seniors retiring with debt, there’s a need to understand how such financial circumstances can impact their retirement income. This article delves into the relationship between The Canada Pension Plan and Bankruptcy, providing a comprehensive guide on what happens to your CPP in the event of bankruptcy.
Understanding Retirement and Debt
Retirement should be a time to reap the rewards of years of hard work. However, the reality is, an increasing number of senior citizens are entering their golden years saddled with debt. A study by StatsCan revealed that about 42% of senior families were in debt in 2016, with mortgage debt being a significant contributor.
If you find yourself in this predicament, managing daily expenses, healthcare costs, and debt repayment on a reduced income can stretch your budget thin. Bankruptcy may seem like a viable option, but it’s essential to understand how it will affect your income and investments.
A Close Look at Retirement Income Sources
Typically, retirement income comes from three different sources:
- Government support such as the Canada Pension Plan and Old Age Security.
- Pension from your employer.
- Income from your investments.
Understanding how each of these sources could be affected by bankruptcy is crucial.
The Canada Pension Plan (CPP) and Bankruptcy
The CPP is a vital source of retirement income for individuals aged 60 and over. Workers and their employers contribute to the CPP during their working years, and upon retirement, individuals receive a monthly CPP payment for life.
As of 2023, the average CPP payment for new retirees aged 65 is $811.21, with the maximum payment being $1306.57 if you wait until 65 to collect it.
If you’re facing bankruptcy, it’s crucial to know that your CPP is protected from creditors. The only exception is the Canada Revenue Agency (CRA), which can claim your CPP. However, filing for bankruptcy will halt this claim, ensuring your CPP remains intact.
Old Age Security (OAS) and Bankruptcy
The Old Age Security (OAS) pension is a universal benefit received by most individuals aged 65 and over. Similar to the CPP, the CRA can claim your OAS, but other creditors cannot. However, they can garnish your OAS payment from your bank account. Filing for bankruptcy stops this garnishment and prevents the CRA from claiming your OAS.
Employer’s Pension and Bankruptcy
You may have been contributing to a pension plan with your employer for years. This pension becomes a significant source of income upon retirement. It’s reassuring to know that your work pension is protected if you file for bankruptcy. However, any lump-sum pension payout can be claimed by creditors if you have unpaid debts and don’t file for bankruptcy.
Registered Retirement Plans and Bankruptcy
Canada offers several registered retirement plans, including:
- Registered Retirement Savings Plan (RRSP).
- Registered Retirement Income Fund (RRIF).
- Locked-In Retirement Account (LIRA).
- Locked-In Registered Retirement Account (LRSP).
- Locked-In Income Fund (LIF).
These plans are secured from creditors’ claims when filing for bankruptcy, with the exception of contributions made to your RRSP in the 12 months preceding the bankruptcy filing.
Other Investments and Bankruptcy
While investments in registered retirement accounts are protected during bankruptcy, other assets are not. These include funds in your Tax-Free Savings Account, non-registered investments such as mutual funds, ETFs, and stocks, funds deposited into a Registered Education Savings Plan, rental properties, equity in your home exceeding the allowable amount, your tax refund, bank account money, and inheritances.
Bankruptcy and Your Pensions: A Conclusion
Considering bankruptcy while retired can be a daunting task, especially with minimal assets outside your pensions. However, knowing that your pension income is protected can provide some relief.
