The second in our series on Good Debt Relief Options – today we will talk about seniors and bankruptcy. We will look at how seniors are affected by debt, whether bankruptcy is a good debt relief option and what other bankruptcy alternatives may be best for seniors.
Like many Canadians, seniors are more heavily in debt than ever before. A study last year by the TD Bank said that seniors over the age of 65 have the highest rate of debt growth among all age groups. While the overall debt level per person is lower for seniors, this accelerated rate of growth in debt raises concerns about the financial vulnerability of many seniors. This can only be highlighted by a study conducted by Hoyes, Michalos & Associates last year which showed the percentage of seniors seeking debt relief who filed a bankruptcy in Canada or consumer proposal with the trustee firm increased to 16% in 2010, up from 12.5% in 2008.
As a senior you may be affected financially by medical bills, rising property taxes, higher utility bills and inflation on everyday items including food and essentials. You may be living on a fixed income from pension and savings that just don’t seem to be enough to make ends meet – prices for necessities rise while your income remains unchanged. As the cost of living increases, so can your credit card debts. What happens when unsecured credit card debt becomes a problem? Is bankruptcy a good debt relief option for seniors or are there other solutions.
Seniors and Bankruptcy
Pension Income versus Wages
While bankruptcy is a way to eliminate your debts, most people file personal bankruptcy as a way to get protection from their creditors. They may be experiencing unwanted calls from collection agencies or being threatened with a wage garnishment. If you are retired your sole source of income may be pension income. If this is the case you do not have any wages that can be garnisheed and it is very difficult for a creditor to garnishee a pension. So most seniors will not need to go bankrupt to gain protection from their creditors.
A major exception to the rule for needing bankruptcy protection as a senior may be if you owe the Canada Revenue Agency (CRA or Revenue Canada) unpaid tax debts. CRA has much more collection rights than your average creditor. CRA is permitted to garnishee all types of pension income under Section 224.1 of the Income Tax Act. So although it is rare, CRA can garnishee your pension income. In the event of significant tax debt and the threat of a pension garnishment, bankruptcy may be an option of last resort.
Protecting Your Home Equity
Is your home your retirement nest egg? If you have equity in your home, and you declare bankruptcy, this equity becomes part of your estate and your trustee will need to realize on this asset for your creditors in most cases. In order to keep your house when filing bankruptcy you need to be able to pay out all of your home equity to the trustee. If you are a senior on a pension income this may be difficult unless you have a family member that can loan you the money. A better option may be to consider a consumer proposal.
RRSP and Pension Plan Exempt in Bankruptcy
As a senior you may also have accumulated some RRSP or RRIF savings that you depend upon to support you in the future. The rules regarding bankruptcy and RRSPs (and other pension plans) have changed in recent years. Now you keep your RRSP and other pension plans except for any contributions you made in the 12 months prior to your bankruptcy. If you have made a large contribution in the last year, you may want to consider filing a consumer proposal as an alternative to bankruptcy.
Seniors and Your Credit Rating
While filing a bankruptcy or consumer proposal will have an impact on your credit score, the truth for most seniors is that you will not likely be borrowing new debt in the future. The objective for most seniors is to eliminate your debt in order to make it easier to make ends meet.
Is Filing Bankruptcy Right for You?
It was hard enough to make ends meet before your retirement. Living on a fixed income and dealing with debts is difficult. The right debt relief option will depend on whether or not you have assets, who you owe money to and how much you owe. For a detailed analysis of whether a bankruptcy or consumer proposal is the right option for you, contact a trustee in bankruptcy today.