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Many people who are considering bankruptcy wonder how their RRSPs will be affected.
When you declare bankruptcy, you will be appointed a trustee in bankruptcy. The trustee is responsible for taking your assets and distributing the profits from them to your creditors.
Most of the time RRSPs are treated like assets and are liquidated during a bankruptcy. However, there are some exceptions.
First, if your RRSP is locked-in due to previous employment, the trustee is not permitted to take the RRSP. An example of this would be an employee who works for a company with a pension plan. When the employee leaves for retirement, the accumulated pension entitlement is transformed into a locked-in RRSP.
The term “Locked-in” means the employee cannot cash in the RRSP, or take money out of it until he or she retires. If the employee is unable to get the money, usually a trustee would also be unable to get it.
Confusion often results from the term “locked-in”. Sometimes people make a payment to an RRSP at a bank, and the funds inside the RRSP are a “locked-in” investment (A guaranteed investment certificate for instance). It can be “locked-in” for several years, to allow the investor to develop a higher interest rate. If you file for bankruptcy, the trustee could cash in your five year accumulation to distribute to your creditors.
Another type of RRSP that cannot be liquidated is an RRSP that has a life insurance component. This exception can be complicated so it is wise to consult a bankruptcy trustee to discuss the matter.
Bill C-55 which was passed in November of 2005, proposed that most RRSPs be exempt in a bankruptcy. Unfortunately the bill is still being written and has not yet been declared part of the law.
It is very important that you discuss RRSPs with a licensed bankruptcy trustee before going ahead with bankruptcy. It is essential that you get help in determining the current laws in Halifax. To find a bankruptcy trustee near you, click here.
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