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Do not self-liquidate

February 20, 2018

Self-liquidation is becoming a major problem for Canadians. Far too many consumers sell off their RSPs and take unnecessary loans against insurance policies to deal with debt problems. Such measures should be last resorts, even behind filing a bankruptcy.

Many assets are exempt from seizure or sale by a bankruptcy trustee (Licensed Insolvency Trustee). You can go bankrupt and keep RSPs and the cash surrender value of life insurance policies. But if you choose to self-liquidate these assets then end up going bankrupt anyway, you lose twice.

Imagine you have the Canadian average of about $32,000.00 worth of credit card debt and you also have $10,000.00 in RSPs and $5,000.00 available as a loan against a whole life insurance policy. Many Canadians would redeem the RSP, incurring tax debt when doing so, and use the resulting funds along with the cash redemption value of the life insurance policy to pay down the debt.

But the self-liquidation can backfire several times, first there’s the tax obligation which could be several thousand dollars. Then there’s the loss of savings and finally the debt is still there since there was not enough money to go around and when the tax debt and insurance loan debt are added back into the equation the overall debt has not been reduced by a whole lot.

Be smart, talk with a licensed insolvency trustee before making the decision to self-liquidate.