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70% of bankrupts have strong credit scores.

September 5, 2017

Canadians are very resourceful and optimistic people and they want to pay their bills.  When money is scarce, due to loss of a job or a small business failure Canadians will turn to whatever resources they have available to get through the tough times.  That may include refinancing their house, liquidating their RRSPs and pension accounts and using credit cards for living expenses and to pay other bills.

The downside of this behaviour, even though the intentions are good, is that it might just exacerbate the problem.  The fact remains that jobs are scarce and incomes are increasingly lower than they have been – with more and more contract and part time jobs than long term full time offerings.

In Ontario Pensions and RRSPs are exempt from seizure by a trustee in bankruptcy.  There is a claw back for contributions made to RSPs during the previous twelve months but they are otherwise exempt.   So think about two models of behaviour for people with perfect credit scores going bankrupt.

In the first imagine a person who is laid off from work and who uses pensions and RSPs to pay down credit while searching for a new job.  This individual lives on their EI benefits and gradually depletes their savings paying down debt.  Eventually they resort to using credit to pay for credit until they realize that their resources have dried up and file a bankruptcy.

Another scenario is where credit is used to pay for credit with the expectation that a new job will be found soon.  As the minimum payments continue to escalate, the debtor may resort to using their RSPs and pensions to continue to make the now much larger minimum monthly payments.  Eventually they too turn to a trustee in bankruptcy for a solution.

There is another possible scenario in which people maintain good credit scores until they file for bankruptcy.   In this case the debtor is far more proactive and files for bankruptcy before liquidating their savings.  This debtor not only eliminates their debts but also has something tucked away for their retirement – so that they will not become a burden on society.