Should you use your RRSPs to pay your debts?

Thursday, July 12, 2018 - 22:32

Bankruptcy, Asset Concerns


It's very common for people who are in debt to WANT to deal with their obligations. They don't want to see a licensed insolvency trustee, make a consumer proposal or file personal bankruptcy. Therefore, they do what they can to attempt to deal with their debts on their own, including cashing-in retirement savings. Unfortunately, in most cases cashing in retirement savings is at best a temporary solution and they still end up needing help to solve their debt problems.

Cashing in retirement savings is a poor strategy for dealing with debt for the following reasons:

  • Retirement savings; pensions, RRSP’s etc. are exempt from seizure by creditors. As a result even if you file a consumer proposal or personal bankruptcy you will be able to keep them. But if you cash them out and then end up filing bankruptcy anyway, you will lose all of your savings.
  • There are significant fees and taxes associated with cashing in retirement savings.
  • You usually cannot get access to or have enough to pay off all of your debts.
  • You will need your retirement savings when you retire to cover your living expenses.

The worst case scenario, which is unfortunately quite common, is someone who despite their best efforts and having cashed-in their retirement savings, still ends up coming to our office and making a consumer proposal or filing personal bankruptcy. This situation happens for two main reasons:

  • They couldn’t get enough money out of their retirement savings to pay off all of their debts and therefore it was not a complete solution.
  • The tax bill and fees associated with redeeming the RRSP and/or pension money was not budgeted for.

These unfortunate cases could have been avoided had these individuals come to see us before cashing-in their retirement savings. I understand that people may not want to meet with us as it could be a hit to their pride, but it doens't hurt to hear us out. If you are considering cashing-in your retirement savings to solve your money problems contact our office so we can review your situation and discuss all of your options in a free, no-obligation consultation.