September 19, 2024
Many wonder how declaring bankruptcy will affect their savings and investments. We look at a bankruptcy’s impact on some common savings and investment accounts here.
Declaring bankruptcy is a challenging decision to make and can bring a whirlwind of emotions and uncertainties. People in this situation often grapple with fears of financial ruin, including how it will impact their hard-earned savings.
Many worry their savings and investments will be entirely wiped out, and they’ll lose everything. While there’s no doubt that bankruptcy does have an impact on these, it’s not quite that straightforward. We spoke to Rebecca Sudano, a Licensed Insolvency Trustee with BDO to find out how different savings and investment accounts are treated during bankruptcy.
Bankruptcy is a legally binding process that gives those overwhelmed by debt a chance at a fresh start. The Bankruptcy and Insolvency Act governs the bankruptcy process.
“Bankruptcy is a way for those in dire financial stress to reset their finances,” says Rebecca Sudano, a BDO Licensed Insolvency Trustee.
A Licensed Insolvency Trustee is the only person who can legally file a bankruptcy on your behalf. You may be required to surrender certain assets to pay your creditors when you declare bankruptcy. The Trustee takes control of assets and distributes them to creditors to pay off the debts.
Filing for bankruptcy issues a stay of proceedings that halts most legal actions being taken against you and prevents your wages from being garnished.
A first bankruptcy lasts between 9 and 21 months. You are released from your debts and considered debt-free upon completing the bankruptcy process.
Bankruptcy is seen as the last resort option for those who are insolvent. There are other options, such as a consumer proposal, which are used much more regularly in Canada to deal with financial issues.
Learn about the process of declaring bankruptcy in detail.
Learn about the bankruptcy processThe types of accounts a person has plays a major role in how savings and investments are affected by a bankruptcy. We’ll look at the most common accounts in Canada and how they can be impacted by declaring bankruptcy.
Some are exempt from having any funds taken and others are not.
A non-registered savings account is a bank account that is not registered with the government in the way that a Registered Retirement Savings Plan (RRSP) is.
“Non-registered accounts can generally be seized during bankruptcy,” says Rebecca Sudano.
Your general savings account is an example of a non-registered savings account. The money in an account like this can be taken by your trustee and distributed to your creditors to help pay off your debts.
That doesn’t necessarily mean you’ll lose it all, though. You will be left with enough to cover your immediate needs.
Money is only taken out of your account to pay off creditors once. Anything you’re able to save while undergoing the bankruptcy process can be kept by you, provided you are fulfilling your bankruptcy obligations.
Many provinces have exemptions for money kept in an RRSP. This exception is not always fully ironclad. Often, money that was contributed to an RRSP in the 12 months prior to declaring bankruptcy can be distributed to your creditors. Money that was contributed to an RRSP over 12 months from the date of filing for bankruptcy cannot.
It’s important to speak to a Licensed Insolvency Trustee to find out how your province's rules could affect your RRSP when filing for bankruptcy.
While a Tax-Free Savings Account (TFSA) is a registered savings account, it doesn’t have the same level of protection as an RRSP, and the assets in it can be seized as part of the bankruptcy process.
“A TFSA is like a glorified bank account. It’s mainly cash,” says Rebecca Sudano.
Your Licensed Insolvency Trustee may be forced to distribute the money from your TFSA to your creditors to pay down your debt.
The same rule applies to a First Home Savings Accounts (FHSA).
When speaking to a Licensed Insolvency Trustee, it’s important to disclose all your assets, including those in a TFSA or a FHSA, to gain a better understanding of how they will be treated if you file for bankruptcy.
Unfortunately, if you have a Registered Education Savings Plan (RESP) set up for a beneficiary, it’s not completely exempt from seizer during a bankruptcy.
Some, but not all of it can be taken, says Rebecca Sudano “the grant portion put in by the government and the interest earned on that grant can’t be taken, however your contributions and the interest earned on those contributions can be.”
Those on disability may be particularly worried about the impact of declaring bankruptcy. The federal government’s Registered Disability Savings Plan (RDSP) allows people to receive the disability tax credit and save for their long-term financial security.
These savings are treated the same way as an RRSP when you declare bankruptcy. Contributions made in the 12 months prior to declaring bankruptcy my be seized, but the remainder can’t be touched.
It doesn’t matter the amount in your RDSP, if it was contributed over a year before you declare bankruptcy then it is safe.
If the RDSP is set up for someone other than the person filing for bankruptcy, such as a dependent with a disability, the funds in the RDSP are generally protected from seizure during bankruptcy.
Many may be tempted to cash out their investments to help themselves pay off a debt, Rebecca Sudano notes, but that’s often not the right choice to make.
“One of the mistakes we see people make before they talk to an LIT is they try to fix the issue themselves by cashing in the investment but that only puts a band-aid and doesn’t solve the issue,” she says.
She also notes that, “sometimes people cash in an investment that would be protected if they reached out for help.”
It's important to consult a Licensed Insolvency Trustee before cashing in any investment to pay a debt. They can help you see if this is a good idea, or if that investment could be protected and help you find a better path forward.
A consumer proposal is the most common alternative to bankruptcy. There were 123,233 consumer insolvencies filed in Canada during all of 2023; 78% of them were handled using consumer proposals; bankruptcy was only used 22% of the time.
It allows you to keep all your assets, including the money in your bank accounts. None of the money in your accounts will be seized and distributed to your creditors during a consumer proposal.
“If I meet with someone who has investments that aren’t protected then we look at getting a consumer proposal,” says Rebecca Sudano. “That way you can you use the money from those investments to help you settle a portion of your debt and lower the amount you have to pay monthly.”
Rebecca offers this example:
“If you have $30,000 of debt and $10,000 in investments, then you can cash those out and hand over the money in a lump sum, and that will mean you now only owe $20,000 now and your monthly payments during the consumer proposal will be lower as a result.”
Just like in bankruptcy, only a Licensed Insolvency Trustee can file a consumer proposal for you, you can’t do it on your own.
For a consumer proposal, the Trustee negotiates with your creditors on your behalf to reduce your overall debt load.
This can lead to the amount you owe being reduced by up to 80% at the most.
You then make regular payments for a set period, up to five years at the most.
A consumer proposal also issues a stay of proceedings in the same way as a bankruptcy, halting legal action being taken against you for your debts as well as stopping any wage garnishment. When you complete the proposal process, you are considered debt free.
Filing a consumer proposal does not affect your credit the same way as filing for bankruptcy.
If you’re struggling with your finances and worried about your savings, speaking to a BDO Licenced Insolvency Trustee, like Rebecca Sudano, can help put your mind at ease. They can examine your full financial status and lay out all your options to become debt-free. Whether that means a consumer proposal or bankruptcy, they’ll outline what it means for your situation and help you understand the upsides and downsides of each.
September 19, 2024
Many wonder how declaring bankruptcy will affect their savings and investments. We look at a bankruptcy’s impact on some common savings and investment accounts here.
