How advisors can help seniors with high levels of debt or facing bankruptcy
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A growing number of seniors have alarming debts and may be turning to advisors to help them get out of the red — especially when faced with bankruptcy.
“You can make tough decisions now or later,” says Steve Bridge, a board-certified financial planner and money coach at Money Coaches Canada Inc. in Vancouver. “Hard decisions now could save them from bankruptcy later.”
He notes that seniors who are in a serious debt situation often want to liquidate all assets to pay off creditors.
“The creditors call them and harass them and they feel like they have to take care of the debt immediately,” says Mr. Bridge. But he warns them to reconsider as some assets are creditor-proof.
A key example is registered retirement savings plans (RRSPs), which are protected from bankruptcy if the investments are more than a year old, says Laurie Campbell, director of client financial wellbeing at Bromwich & Smith Inc., a Toronto-based licensed bankruptcy trustee firm.
“So they don’t necessarily have to retire their RRSPs to pay down debt and can potentially avoid losing those assets,” she says.
Canada Pension Plan, retirement benefits and blocked employer pensions are also exempt from creditors, Ms Campbell adds.
The reason for these exemptions is to give people some retirement income to survive. But there are certain parameters. While annuities are exempt, if the customer owes money to a financial institution where their annuity money is deposited, that institution can seize the funds, Ms Campbell says. Therefore, they may have to deposit their pension with another bank.
In addition, under certain conditions, creditors do not have access to permanent insurance policies and special funds. For example, the policy must be privately owned and the person cannot buy these products if they know they may face bankruptcy, says Elke Rubach, director at Rubach Wealth Holistic Family Advisors in Toronto.
However, creditors can seize assets such as a tax-free savings account, funds in a registered education savings plan, and equity in a home. Ms. Campbell notes that each province has different rules for personal items such as vehicles and other valuables.
How financial struggles can escalate
She has found nearly defaulting seniors have been struggling financially for some time and have had a major lifestyle curveball that has thrown their already reduced income over the edge.
More recently, rising house prices, inflation and the cost of living have exacerbated the situation. She says seniors have sometimes made bad decisions, like following friends’ investment tips of the month or having a vendor offer an investment product that isn’t right for their risk tolerance and time horizon.
Ms Campbell has also seen cases of low-income seniors helping their children who have lost their jobs or become underemployed during the pandemic.
“Their adult children and/or grandchildren have moved back in, and that’s putting an additional strain on their budget,” she says.
Meanwhile, Mr. Bridge says customers sometimes have hints of a debt problem. A red flag could be a client who suddenly wants to withdraw large amounts of money from an investment or is struggling to pay off debt.
Sometimes clients try to hide their debts, which is why he engages in many frank conversations to highlight potential problems.
“Ask good questions and really listen to the answers,” he says. “Ask about debt, whether it’s auto loans, personal loans, lines of credit, and get an idea of their liquid assets.”
From there, it should be obvious to a counselor if that person needs help from anyone other than your own, he adds.
In the case of struggling business owners, Ms. Rubach says a lack of cash flow planning, budgeting and unmanageable debt can be challenging for some, who typically invest everything back into their business no matter what.
“They don’t always have the foresight to separate personal and business and have a team of consultants to help them do that,” she says. “We stress that you need to be conscious of your cash and spending.”
Whilst Ms. Rubach has had prospects facing bankruptcy come to her regarding their financial ability, she knows this is not her expertise and will refer them to a licensed liquidator or credit counseling professional.
“We consultants have to know our limits. When planning debt repayments such as B. Student loans help, but bankruptcy is not our specialty,” she says.
A bankruptcy expert will share options for seniors with out-of-control debt, such as:
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