RRSP’s: What Happens To Them When You Go Bankrupt?

 

I came across this fantastic news today in the Toronto Sun newspaper that will give investors some peace of mind:

If you find yourself in financial trouble and have to declare bankruptcy, your registered retirement savings are now safe from your creditors.

Recent amendments to Canada’s Bankruptcy and Insolvency Act now rule that for bankruptcies occurring after July 7, 2008 creditors can no longer go after your Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) or Deferred Profit Sharing Plans (DPSPs) to pay off owing debts.

In the past, only some of your investments such as certain segregated funds and pension funds were protected from creditors. Now, you don’t have to worry that all your retirement savings will be forfeited if you go bankrupt. However, to prevent intentional protection of funds, any money put into registered plans in the 12 months before a bankruptcy (or longer) may not be subject to this new rule.

Several provinces (Manitoba, Saskatchewan, P.E.I., and Newfoundland) already provide creditor protection. Those laws will remain in place and the new federal law applies everywhere else. Quebec law protects some registered retirement plans but this new law appears to cover all RRSPs in Quebec.

All Canadians will benefit from this new rule change in the following ways:

– Retirement protection for small business owners:

In 2003, the Canadian Federation of Independent Business conducted a survey of members that found 91% of small business owners used RRSPs as a retirement savings vehicle. CFIB has been calling on the government to protect these retirement savings for years. Many small business owners and professionals put their personal assets at risk. The CFIB survey says only 28% of small business owners have already-protected formal pension plans. This rule will help small business owners protect one of their main retirement savings strategies while still investing other money in their business.

– Greater diversification:

As we all know, you should spread your investments around to reduce your risk. Before this amendment, if protection from bankruptcy was a concern for your retirement savings your investment choices may have been limited. Now you and your advisor can look at the universe of investments to choose what works best for your retirement portfolio.

- Potential fee savings: Bankruptcy-protected segregated funds have higher fees due to the creditor protection and other unique features. Investors can now work with their financial advisers to see if there are appropriate alternative strategies that can save them some money.

Most GTA – Greater Toronto Area -  financial advisers can help you determine if this rule change affects your personal financial planning strategies. Consult a Toronto bankruptcy expert to find out more details about how these changes could affect your situation. If you find yourself in financial difficulty consult your local non-profit credit counselling agency. Their counsellors can help you decide if bankruptcy is the right course of action for you.

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