Are you retired (or nearing retirement) and overwhelmed by crippling debts? If so, you may have considered filing bankruptcy as a solution. However, you may also be concerned about the impact of the bankruptcy process on your pension income.
You’ve spent a lifetime setting aside money in your company pension plan and paying into the Canada Pension Plan (CPP). Naturally, you don’t want creditors to snatch up your hard-earned savings if you decide to file for bankruptcy. Luckily, pensions in Canada receive favourable treatment under the country’s bankruptcy laws.
In this guide, we’ll explain what happens to pensions in bankruptcy, covering both government programs (CPP and OAS) and employer-sponsored retirement plans. We’ll also describe how pension income can impact the cost and length of your bankruptcy.
Contact David SklarDo you lose your CPP and OAS benefits under bankruptcy?
The Canada Pension Plan (CPP) and Old Age Security (OAS) are the two most important sources of retirement income you receive from the federal government. Most retirees depend on these two programs to supplement their income—you may count yourself as one of them.
The good news is that your CPP and OAS income is safe from creditors under bankruptcy. If you file for bankruptcy, you’ll continue receiving any CPP and OAS payments to which you’re entitled. Thanks to the Bankruptcy and Insolvency Act (BIA), creditors cannot garnish money from federal retirement programs.
Can creditors seize CPP and OAS income if you have unpaid debts but don’t file for bankruptcy?
Creditors cannot legally seize your CPP and OAS payments to cover unpaid debts, even if you don’t file for bankruptcy. That’s because, under Canadian law, you cannot assign your CPP and OAS entitlements as security for a loan. As a result, you’ll continue to collect money from these two programs if you have private past-due debts.
However, there are exceptions to this rule, the chief one being if you owe tax debt to the Canada Revenue Agency (CRA). The CRA possesses vast collection powers to recover unpaid income taxes, including redirecting your CPP and OAS payments toward your balance owed. In other words, it can withhold and apply the money you’d typically receive toward your tax debt. Standard garnishment rules, such as obtaining a court judgement, don’t apply to the CRA.
It’s also important to note that while creditors can’t garnish CPP and OAS income directly, they can do so indirectly. For example, financial institutions like the Big Five banks can use the right of offset to garnish CPP and OAS payments once they are deposited in your bank account. If you owe past-due debts to your bank, let’s say on a credit card, it can legally withdraw money from your chequing account to pay off your balance. Other creditors with whom you hold unpaid debts can go after your money as well, though they need to obtain a court order first.
The key takeaway is that once CPP and OAS payments arrive in your bank account, lenders can take legal action to take the money straight from your bank account. However, filing for bankruptcy will halt all CPP and OAS garnishments immediately, including those initiated by the CRA.
Do you lose your company pension if you file for bankruptcy?
In Canada, pension plans that companies and government organizations provide to their employees are called registered pension plans (RPPs). Statistics Canada reports that over 6.4 million workers in Canada hold membership in RPPs, which include benefit pension plans and defined contribution pension plans. For many Canadians, their employer-sponsored pension is the main pillar of their retirement plan, as CPP and OAS payments typically don’t provide sufficient financial security.
Creditors aren’t entitled to your RPP assets if you file for bankruptcy, thanks to bankruptcy laws at the provincial level. For example, in Ontario, the Ontario Pension Benefits Act governs the province’s registered pension plans (RPPs). This legislation protects all pensions administered by private companies and governments. All contributions to such plans, whether made by you or your employer, are off-limits to creditors, regardless of the deposit date.
Note: Creditors cannot garnish your RPP income, whether you declare bankruptcy or not. Much like CPP and OAS, you cannot pledge your RPP as collateral for a loan, so lenders can’t directly target any of the funds in the plan. Of course, once the money is in your chequing account, they can freely seek a court judgement to collect it.
How other registered retirement plans are treated under bankruptcy
Besides CPP, OAS, and RPPs, registered retirement plans are available in Canada to help build up your nest egg. These include:
- Registered Retirement Savings Plan (RRSP)
- Registered Retirement Income Fund (RRIF)
- Locked-in Retirement Account (LIRA)
- Life Income Fund (LIFA)
- Registered Disability Savings Plan (RDSP)
The impact of personal bankruptcy on these accounts differs depending on which you own and the date of the most recent contributions. For example, Section 67 (1) (b.3) of the BIA safeguards RRSPs from seizure in bankruptcy, with the exception of contributions made in the last 12 months of your filing date.
Learn more about how personal bankruptcy affects your RRSP and other registered savings accounts.
Savings not exempt from bankruptcy
Not all savings and investments you own enjoy the same protection under Canada’s bankruptcy laws as CPP, OAS, and company pension plans. In general, creditors can seize any assets you hold in non-registered accounts. These can include:
- Cash held in chequing accounts
- Regular savings accounts
- Mutual funds
- Marketable securities (stocks, bonds, exchange-traded funds, etc.)
- Rental properties
- Tax-Free Savings Account (TFSA)
How pension income impacts the cost of your bankruptcy
Regardless of the source, your pension income may play a significant role in the cost of your bankruptcy. When you file for bankruptcy, your trustee will determine if you must make surplus income payments to your creditors. In doing so, they’ll calculate your total after-tax household income, including payments from all public and private pensions.
Collecting a large pension puts you at risk of exceeding the surplus income limit set annually by the federal government. If you do, you’ll have to contribute surplus income payments, increasing the cost and length of your bankruptcy.
Given the prospect of paying surplus income, assessing how your pension earnings will affect your bankruptcy is important. Depending on your total household income and the value of your non-exempt assets, filing a consumer proposal may be a better option to solve your debt problems.
The bottom line on pension income in bankruptcy
Losing your pension due to bankruptcy is frightening, especially if you’re nearing retirement or already enjoying your golden years. Luckily, pension income is protected under Canada’s bankruptcy laws, both at the federal and provincial levels. Creditors cannot seize money you receive from federal retirement programs, such as the CPP and OAS, or employer-sponsored pension plans. You’ll continue to receive your payments uninterrupted throughout your bankruptcy.
Still, it’s wise to consider the impact of your pension income before filing for bankruptcy. Depending on your financial situation, you could lose more than you’re comfortable with regarding assets and income. For this reason, bankruptcy is usually the last resort in dealing with unmanageable debts.
Make sure to learn about the pros and cons of bankruptcy before making your decision. Compare it to alternative debt relief solutions, such as a consumer proposal. If you need guidance on tackling your debts, book a free consultation with one of the Licensed Insolvency Trustees at David Sklar & Associates. We can help give you the fresh start you deserve!
