Getting ready for retirement, but worried about the amount of debt you’re facing? You might be considering your debt relief options, and while filing bankruptcy can feel like a daunting prospect for anyone, it’s important to understand how it affects your financial assets, particularly your pension. For many Canadians, their pension represents a crucial part of their financial security in retirement. Of course, nobody wants to spend their lifetime paying into a pension plan only for it to be taken away by creditors if you file for bankruptcy. Thankfully, Canada’s bankruptcy laws can help to protect pensions. If you’re facing bankruptcy, knowing what happens to your pension can help you to make informed decisions and ease some of the uncertainty. In this article, we explain what happens to your pension if you go bankrupt in Canada, whether it’s a government plan or an employer-sponsored retirement plan.
How does bankruptcy work in Canada?
When you file for bankruptcy in Canada, most of your assets are surrendered to a Licensed Insolvency Trustee (LIT), who sells them to repay your creditors. Not all assets, however, are treated the same. Some are exempt from seizure, meaning you can keep them even after declaring bankruptcy. Your pension, depending on the type and status, might be one of those protected assets.
Types of pensions and their treatment in bankruptcy
The impact of bankruptcy on your pension largely depends on the type of pension you have. Here’s how different types of pensions are typically treated:
Registered Pension Plans (RPPs)
- What it is: these are employer-sponsored pensions where both you and your employer contribute to a retirement fund.
- Impact of bankruptcy: the funds in an RPP are generally protected from creditors during bankruptcy. This means that your current and future pension benefits are not at risk of being seized by your LIT to pay off debts.
Registered Retirement Savings Plans (RRSPs)
- What it is: RRSPs are personal retirement savings accounts that you contribute to, often with tax benefits.
- Impact of bankruptcy: in Canada, RRSPs are largely protected from creditors in bankruptcy, with a key exception – any contributions made within the 12 months prior to filing for bankruptcy may be subject to seizure. This means that while most of your RRSP will be safe, recent contributions could be used to pay off creditors.
Old Age Security (OAS) and Canada Pension Plan (CPP)
- What it is: these are government-administered programs providing income to seniors based on age and contributions made during their working years.
- Impact of bankruptcy: both OAS and CPP benefits are exempt from seizure in bankruptcy. This ensures that your government retirement income is secure, even if you face financial difficulties.
Locked-In Retirement Accounts (LIRAs)
- What it is: these are similar to RRSPs but are usually created when you transfer funds from a pension plan after leaving an employer.
- Impact of bankruptcy: LIRAs are generally protected in bankruptcy, as they are considered locked-in and are meant solely for retirement. The funds within a LIRA cannot be accessed by creditors.
Defined Contribution and Defined Benefit Pensions
- What it is: a defined contribution pension is based on contributions from both the employer and employee, with the final benefit depending on investment performance. A defined benefit pension guarantees a certain payout in retirement, based on salary and years of service.
- Impact of bankruptcy: both types of pensions are typically protected during bankruptcy. The funds accumulated in these pensions remain secure and cannot be seized by creditors.
What happens to your pension income after bankruptcy?
While your pension funds are generally protected during bankruptcy, any pension income you receive could be treated differently. If you’re receiving pension payments at the time of bankruptcy, these payments may be considered part of your income. This means they could influence the amount you’re required to pay into your bankruptcy estate if you are subject to surplus income payments. Surplus income is calculated based on guidelines set by the government and depends on your income level and the number of dependents you have. If your income exceeds the government’s threshold, you may need to make additional payments during your bankruptcy period.
What to do if you’re concerned about your pension
If you’re considering bankruptcy and are worried about the potential impact on your pension, it’s crucial to seek professional advice. A reputable Licensed Insolvency Trustee can provide you with specific information tailored to your situation, ensuring that you understand how bankruptcy will affect your financial future. In some cases, there may be alternatives to bankruptcy that can protect your assets more effectively. Consumer proposals, for example, allow you to settle your debts for less than what you owe while keeping your assets, including your pension.
Bankruptcy is a significant step that can affect many aspects of your financial life, but in Canada, your pension is generally protected. Understanding the specific rules that apply to your pension type can help you navigate this challenging time with greater confidence. If you’re facing financial difficulties and are unsure about how your pension will be impacted, book a free, no-obligation consultation with a Licensed Insolvency Trustee at Spergel to explore your options and safeguard your future.
