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When you become a senior, your relationship with money changes in a drastic way. It’s no longer something you can expect to keep coming in every two weeks through employment income. If you are still working, it’s likely that one of your financial goals is to eventually stop depending on that salary.
Today, a third of Canadian seniors are carrying consumer debt into retirement, meaning they owe credit card companies, payday lenders, lines of credit, and other types of debt. On average, they owed over $11,000 in non-mortgage debt in 2018.
Senior debt is problematic for those who are moving into their non-working years. They’ll be relying on their pension or, increasingly, investment income like an RRSP or TFSA to cover their living expenses.
All this comes at a time when seniors are asking themselves if they’ll have enough money down the road.
If you’re dealing with senior debt, it’s time to review your debt relief options. You can check out our debt relief tips for a general understanding, but below, you’ll find answers designed to help those who are retired or nearing retirement.
How Seniors Wind Up in Debt
People carry consumer debt into their 50s, 60s, and beyond for a variety of reasons. As you get older, it becomes harder to shift careers, and you’re more vulnerable to broader economic shifts that can lead to industry downsizing. Sometimes during a downturn, older workers are pressured into early retirement so companies can save on the higher salaries they pay to their most senior employees. In many cases, older workers face long periods of unemployment as they ride out industry changes. Health issues can also cause a loss of income over periods of time.
Even if and when you get back to work after a long period of unemployment, you may have drawn on a line of credit or credit cards to bridge the gap.
Borrowing Money Post-Retirement
Getting into debt post-retirement can be a dangerous proposition. Why does it happen? Seniors who rely on a fixed income are particularly vulnerable to rising costs. Higher utility bills, such as Ontario’s rising hydro rates, or major changes in the cost of living such as property taxes, condo fees, or groceries and gas can throw out the best-planned retirement budgets and leave you in a pinch.
Unfortunately, many seniors are turning to payday loans as a way to cover immediate expenses. However, if your retirement income isn’t enough to cover your expenses this week, it won’t be enough to cover expenses and repay loans with predatory interest rates next week.
What Can Happen If You Have Senior Debt?
What are the consequences of owing too much money when you’re in retirement? Can your creditors garnish your pension or seize your retirement savings?
If you’re worried about losing your pension to creditors, you should know that most sources of retirement income are protected in Canada. Government funds include the Canada Pension Plan (CPP), Old Age Security (OAS), and Guaranteed Income Supplement (GIS). Only the Canada Revenue Agency is allowed to garnish your Canada Pension Plan (CPP) payments if you owe back taxes. They must stop if you declare bankruptcy.
When it comes to other private pensions, other creditors cannot seize the pension itself, but they can garnish the income paid out of it. Again, bankruptcy can protect that income, and if you’re facing a garnishment on pension income, it’s time to talk to Licensed Insolvency Trustees about senior debt relief.
Wage garnishments on pension income are possible, though your pension itself is largely protected. However, even if your pension is safe, going into debt when you’re in retirement can cause cash flow issues. High-interest debts eat into your purchasing power, which may already be limited by a fixed income.
If you have the option, it’s always better to pay off debt before you retire, unless that means draining your savings. Continuing to work and pay off debt with employment income is the safest way forward if you are able.
What Are Your Options for Senior Debt Relief?
There are several debt relief options that you can pursue. Whether or not they work for you depends on your financial situation. Are you still working, or have you retired? How much and what kind of savings do you have? What kind of debt do you owe?
Consider your debt consolidation options, such as a debt consolidation loan or management plan. A debt consolidation loan is typically taken out with a bank or credit union at a lower interest rate than their credit cards or payday loans. You can use this money to settle your high-interest loans, allowing you to save money in the long run.
Senior debt financing such as a debt consolidation loan makes sense if your pension payments can keep up with your new monthly payment. Lowering the interest rates on what you owe can make a big difference.
There are also government debt relief options that you can use. These include filing for bankruptcy or a debt consumer proposal, two different ways of settling your debt.
A consumer proposal is a government debt relief option that also functions similarly to debt consolidation. A big advantage is that you get relief from interest rates and only make one monthly payment. It is also legally binding and protects you from creditors. Your monthly payment is based on how much you owe as well as what you can afford. Unlike a loan, a consumer proposal can also result in a sizable reduction to the amount of the principal.
Consumer proposals are a good way to pay off senior unsecured debt if you have higher than average pension or investment income, and you don’t depend on every dollar to cover your living expenses. A Licensed Insolvency Trustee can help go through your retirement budget to determine how much you can afford.
Bankruptcy does not require you to make ongoing monthly payments. Non-exempt assets are liquidated to pay back your creditors, and any debts remaining are discharged. Bankruptcy can be a good option for seniors with limited income, but you have to be careful about considering your assets and savings, or you could lose more than you bargained for.
What Assets Are Exempt from Bankruptcy?
Bankruptcy can feel like an intimidating prospect if you have assets on the line. It helps to know which assets are exempt from bankruptcy before you explore your options further.
RRSP: Your RRSP savings and RRIFs are exempt from bankruptcy proceedings, except for contributions made within 12 months of filing. RRSPs are often some of the largest savings available to seniors, and when they get into debt, they consider draining it to pay back their creditors.
That can be a major financial mistake that leaves you without enough savings for your retirement. Because RRSPs are protected from your creditors, bankruptcy may be a better way forward.
LIRAs, RRPs, and Pension Plans with Life Insurance: Locked-in Retirement Accounts, Registered Pension Plans, and pension plans with life insurance are likewise protected from bankruptcy.
Home Equity to a Limit: This is where bankruptcy can become complicated for seniors. If you don’t own a home, you have little to worry about. If you do, but you have less than $10,833 of equity it is exempt from bankruptcy. Often seniors have had more time to pay down their mortgages and may have equity beyond that limit. In such a case, none of the equity it is exempt, and you should speak to a Licensed Insolvency Trustee who can help you navigate this situation.
TFSA: Tax-Free Savings Accounts and investments made with them are not protected, which is why some choose to invest in an RRSP first, regardless of which account makes more sense from a tax perspective.
Investing in a TFSA often makes sense if you earn less than $50,000 per year, and it can also be useful if you still have money to spare after making the maximum contribution limit to your RRSP.
The TFSA was only introduced in 2009 and compared to younger investors, and seniors likely have much more in their RRSPs. However, if you have made TFSA contributions, it’s important to know that they don’t receive the same protection.
Rental Income Property and Vacation Homes: Properties that are not your principal residence can also be seized in bankruptcy. This is important for seniors who have invested in rental properties to make up part of their retirement income.
If you have rental property income, you’re more likely to be able to afford the monthly payments on a consumer proposal, which does not touch any assets.
Avoid Debt in Retirement
Borrowing when you’re retired can be a dangerous proposition. Without employment income, paying back high-interest debts can put you in a difficult position. The high interest rates on credit card balances can make it extremely difficult to pay them off on a fixed income. Even low-interest loans like a home equity line of credit (HELOC) can put you in danger. Though many see HELOCs as a form of senior debt financing, if you fail to make payments, you can jeopardize ownership of your home.
Be careful where you borrow, and if you’re already drowning in debt, learn more about your debt relief options.