What Happens If You Retire Before Your Debts Have Retired?

Navigating Retirement Amidst Unpaid Financial Obligations: A Comprehensive Guide

The increasing number of individuals entering retirement with unresolved debts is a growing concern. Data from credit reporting agencies reveal that the average debt for consumers aged 65 and older has witnessed the largest annual increase among all age groups. So, what happens if you retire before your debts have retired? Let’s delve into this question and explore several aspects which retirees should consider when seeking solutions to their debt issues.

1. Is Your Pension Safe From Creditors?

While bankruptcy can erase your debts, many people resort to it as a shield against their creditors. Upon retirement, your primary income is usually pension funds. If that’s the case, you don’t have any wages that can be garnished. It’s challenging for a creditor to garnish a pension.

However, if you fail to pay your debts, your creditors have legal remedies to recover those debts. They can obtain a judgement against you in court and seize your bank accounts. This generally happens only in severe cases, so most seniors will not need to resort to bankruptcy or a Consumer Proposal to protect their income from creditors.

1.1. The Exception: Canada Revenue Agency (CRA)

The Canada Revenue Agency (CRA) has collection tools that ordinary creditors, such as credit card companies and banks, do not. If you have unpaid tax debts, certain sections of the Income Tax Act give the CRA the power to garnish your Canada Pension Plan (CPP) and Old Age Security (OAS) benefits.

Though it is rare, the CRA can garnish your pension income and freeze bank accounts without a Court process. They can also garnish quarterly GST credit and tax refunds to offset outstanding tax debts. If you have significant tax debt and face the threat of pension garnishment, bankruptcy or filing a Consumer Proposal may offer immediate relief and protect your income.

2. Can Creditors Touch Your Retirement Savings?

Throughout your working life, you may have contributed to Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Locked-In Retirement Accounts (LIRAs), Registered Pension Plans (RPPs), or Deferred Profit Sharing Plans (DPSPs). Most people depend on these investments to enhance their pension income during retirement.

Pensions are safeguarded from your creditors. Most RRSPs, RRIFs, DPSPs are also shielded from your creditors. These types of retirement savings are also exempt from seizure in a bankruptcy. Some contributions made to pension plans, beyond the minimum mandatory contributions, may be available to your creditors.

2.1. Exceptions to the Rule

Any amounts invested in RRSPs, RRIFs, or DPSPs more than a year before seeking bankruptcy protection are exempt from seizure in a bankruptcy or in a Consumer Proposal. Any amounts invested in an RRSP, RRIF, or DPSP within the last 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.

3. Can Your House Be In Danger?

Filing for bankruptcy or a Consumer Proposal does not necessarily mean losing your house. A certain portion of the equity in your house is protected in a bankruptcy. The exemption amount is considered when determining whether you have equity in your house that would be available to your creditors in a bankruptcy or Consumer Proposal.

If your house 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.

3.1. Keeping Your Home

Often, if you no longer have unsecured debts to pay because you have filed for 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 for bankruptcy or a Consumer Proposal.

3.2. Equity and Its Implications

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 doesn’t mean that you will lose your home. A bankruptcy trustee is required to realize this asset for the benefit of your creditors. If you want to keep your home after filing for bankruptcy, you would be required to pay in your portion of the non-exempt equity into your bankruptcy estate.

3.3. What Consumer Proposal Means for Homeowners

Filing a Consumer Proposal allows individuals to retain their non-exempt assets by making monthly payments over a longer period (up to five years). Because you have a longer period to purchase the non-exempt equity in your home, your monthly payments towards a Consumer Proposal would be lower than the required monthly payments in a bankruptcy.

3.4. Selling Your Home

If you are looking to downsize or struggling with mortgage payments, you can choose to sell your home while in bankruptcy or after filing a Consumer Proposal. In a bankruptcy, the non-exempt equity would go 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 save the money while continuing to make your monthly payments into your Consumer Proposal.

4. Seeking Professional Advice

Retirement brings unique challenges. If you find yourself burdened with persistent debt, it may be time to consult a professional. A licensed Trustee office, like Bankruptcy Canada, can ensure all your options are considered and you understand the benefits and risks of each. Bankruptcy Canada offers a free consultation and can provide some peace of mind.

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