What Happens to my Savings in a Bankruptcy?
There are thousands of Canadians that find themselves in a difficult financial situation, unable to pay their debts.
It’s far more common than people realize because the economy is struggling and the cost of living is on the rise.
When your finances are stretched, borrowing is often the only option and this can quickly lead to some serious debt issues.
What a lot of people don’t realize is that, even if you are able to cover your debt payments every month, you’re still in a bad position.
Any slight change to your financial situation, like a decrease in income or an unexpected bill, can quickly put you in a position where you are unable to pay your debts.
As the late charges pile up and the debts get bigger, you may find that you simply cannot pay off your debts.
When this happens, you need to start thinking about your options for debt relief, but many people are reluctant to consider bankruptcy because they have some big concerns.
One of the most common questions that people have is, what happens to my savings in a bankruptcy?
People worry that they will be left with nothing after the bankruptcy and that raises the question of how you are going to pay for retirement, especially if you plan to retire relatively soon.
The good news is, you won’t be left with nothing because certain types of savings are protected during a bankruptcy.
If you are considering debt relief options and you are wondering what happens to my savings in a bankruptcy, this guide will tell you everything that you need to know.
What Kind Of Savings Are Protected?
There is a range of different savings accounts that you may have money in, and your level of protection will depend on the type of savings that you have.
The most common types of savings include:
- Mutual funds.
- Tax free savings.
- Registered Education Savings Plans (RESPs).
- Locked In Retirement Accounts (LIRAs).
- Registered Retirement Savings Plans (RRSPs).
Although the laws are different depending on where you live, LIRAs and RRSPs are exempt in most provinces.
This means that during a bankruptcy, when your creditors seize assets to pay back the debt, they cannot touch those retirement accounts.
However, in some provinces, your creditors will be able to seize any contributions that have been made in the last 12 months before you filed for bankruptcy.
Unfortunately, many other savings accounts are not exempt and your savings can be seized by your creditors in a bankruptcy.
Any tax free savings accounts and non-registered plans are not exempt during a bankruptcy.
In the majority of provinces, RESPs are not exempt either, but they will be protected in some provinces.
Before you file for bankruptcy, it is important that you discuss your situation with a licensed insolvency trustee so they can explain the regulations in different provinces and give you a clear idea of how much of your savings are exempt.
What Other Options Do You Have?
If you are concerned about your savings during a bankruptcy and you want to make sure that you are in a stable position when you retire, you should consider some of your other options.
During a bankruptcy, you do have the option of a ‘buy back’ in some cases.
If you pay an amount equal to the value of an RESP, you can buy it back from your bankruptcy and keep the savings.
This is a good option because the penalties you incur when cashing out early can be quite large.
In some cases, it may be best to opt for a consumer proposal instead of a bankruptcy.
When you file a consumer proposal, you offer to pay back a portion of the debt over a period of up to five years.
You will need to offer to pay more than the creditors will get back during a bankruptcy, and if more than 50% of your creditors agree, you can move forward.
A consumer proposal is the best option if you are concerned about your savings because your assets will be protected.
Choosing The Right Option
The rules and regulations around exemptions can be quite complex and they vary depending on which province you live in, so it’s important that you take expert advice before deciding which debt relief option is right for you and how you should handle your savings.
When you have a consultation with us, we will give you expert advice on different debt relief options and explain exactly what a bankruptcy will look like for you.
Everybody’s situation is unique and, depending on your circumstances, you may or may not be able to keep your savings.
If your savings are not exempt, you need to decide whether you want to move forward with the bankruptcy and explore your options for a ‘buy back’ or look into a consumer proposal.
We will help you to make that decision and find the best solution so you can protect as much of your savings as possible.
Debt relief is not designed to leave you with nothing, it is designed to give you a fresh start and clear your debts, while also leaving you in the strongest possible financial position.
Unless you are well informed about debt relief and what happens to your savings in a bankruptcy, you could end up making the wrong decision and putting yourself in a difficult financial position for the future, but we are here to help you avoid that.
If you are considering bankruptcy or you have a lot of debts and you just want some more information about the different debt relief options available to you, our expert team can advise you.
We have over 20 years experience giving debt advice and helping people start their journey towards financial freedom, so you will be in good hands.
If you would like some free, no obligation advice, get in touch today.
You can reach us on the phone or fill out an evaluation form and we will get back to you.