Should I cash in my RRSP to pay my debt or consider filing an insolvency?

If you are struggling with your debt and asking the above question, you should seek the advice of a Licensed Insolvency Trustee (“LIT”) to review your financial situation in detail and explore all solutions.  Your RRSPs may be protected from your creditors and retained for your future retirement.

A couple of important items to consider:

• RRSPs that are held with a life insurance company and have a designated beneficiary of a parent, child, or spouse are exempt in a bankruptcy, and thus you would be able to keep them.
• All other RRSPs are exempt in a bankruptcy, other than contributions in the last 12 months. Thus, if you file an assignment in bankruptcy, the trustee will only be looking to realize on the contributions in the 12 months preceding your bankruptcy.
• On a withdrawal of an RRSP, the financial institution will withhold some tax at source. You will be obligated to report the income on your personal income tax return, and depending on your other income, you may owe more personal income tax.
• An insolvency is the filing of a bankruptcy or consumer proposal to deal with your unsecured debt.
• An insolvency will stop a garnishment of your wages and legal action by an unsecured creditor.

Free consultation and solutions analysis

A free consultation with a LIT will review your realizable assets, exempt assets, liabilities, income and expenses. The trustee will review your assets that must be realized in a bankruptcy, potential surplus income payments that may be required, and tax refunds that will be distributed to the trustee.  They will explain how much you could offer to your creditors to settle your debt with one monthly payment over a maximum 5-year time period in a consumer proposal. They will compare bankruptcy and consumer proposals to the do-it-yourself options of paying off your debt on your own or attempting to obtain a consolidation loan.

If you can cash in some of your RRSPs, afford to pay any tax liability that may arise, and pay down your debt in full, this may be a viable solution for you.  You will eliminate the future interest on the debt and hopefully be able to save to re-contribute to your RRSP in the future.

If you are cashing in exempt RRSPs to pay down some of your debt without a permanent solution to eliminate all of your debt, an insolvency may be a better solution for you.  A bankruptcy or consumer proposal will allow you to retain your RRSP for future retirement while having a plan for a debt-free future.

Seeking help when you are struggling with debt is a hard step to take.  The trustees at Taylor Leibow Inc. have been helping individuals find permanent debt relief solutions for over 35 years.  Reach out to us today for a free consultation to help you achieve your fresh start.