Don't cash RRSPs to pay credit card debt — advice from two financial experts answering your questions on debt

Do you lose your house when you file for bankruptcy? Should you cash out your RRSPs to avoid it?

Too many people rely only on creditors or collection agencies for debt advice — at least according to one member of our CBC Calgary text messaging community.

So we put out a call. Then we put your questions to two experts: Taz Rajan, a community engagement partner with Bromwich and Smith, and Jolie Viguers, a certified professional accountant and certified financial coach.

Read the summary below. Listen to the podcast or watch the video for the full interview. Or, if you have more questions, tune in to the CBC provincial call-in show Alberta@Noon. These guests are now booked for Monday. It's at 99.1 FM or online here.

When is declaring bankruptcy the right solution? 

Alison spent years racking up debt and paying it off while working for her family business. But that cycle of spending started to catch up with her after the business got sold, she had a family, and interest rates took off. She now pays roughly $1,000 per month just to cover the interest on her line of credit and credit card. 

"I don't know where to turn … I'm also kind of ashamed because I used to have money."

Alison asks whether she should declare bankruptcy or cash in her RRSPs to pay off her $75,000 in personal debt?

Taz Rajan says bankruptcy is always the last option, not the first.

She says the best way to figure out what is right for you is to get a free, no obligation consultation with a licensed insolvency trustee who can help you figure out your expenses, incomes, assets and liabilities.

Rajan says only a licensed insolvency trustee can file a bankruptcy on your behalf. 

To actually file the bankruptcy, the fees are about $200 per month or more, depending on your income, for six months.

She now offers insight on bankruptcies from both sides of the table.

Seven years ago, Rajan was in a serious car crash that put her into financial ruin. She got a concussion and was unable to work. But she says that didn't stop the bills, her mortgage and utilities from needing to be paid. She says she eventually ran out of savings and RRSPs and could no longer make her payments.

She says she had no choice but to declare bankruptcy.

"But today I use that as a springboard, and I hope that my story will help somebody realize that it could happen to anybody, and it's not the end of your life or your credit as you know it," said Rajan.

What are the pros and cons of declaring bankruptcy? 

Julia works in the arts sector and owes $90,000 in credit and student loans. She wants to know how badly declaring bankruptcy would affect her life.

Rajan says it's up to each person to weigh the pros and cons of bankruptcy.

On the pro side, she says, bankruptcy instantly stops the harassment from creditors and sometimes forgives all of your debt, including CRA tax debt. It allows you to keep some equity in your home, various household items and RRSPs, because all of these items are legally exempt. 

That's why Rajan advises people not to cash in RRSPs to pay off debt.

"Anything that is registered, RRSPs, LIRAs, all of these things, they're protected under the Insolvency Act, which means your creditors do not have a right to that," said Rajan. 

"Guilty as charged, that's what I did. Now I am kicking myself."

On the con side, Rajan says, a bankruptcy wouldn't necessarily forgive Julia's student loans — they're only eligible under certain conditions.

She also says bankruptcy is the worst rating you can receive on your credit report. And it stays there for nearly seven years.

But she says it's important to put that worry into perspective, because not paying bills or wracking up several credit cards also hurts your credit.

Plus with bankruptcy, there is an end in sight.

"As long as you keep your obligations and you are discharged, you can get credit again. It's not the end of the world, there is life after debt," said Rajan. 

What's the difference between a consumer proposal and bankruptcy?

"Consumer proposals are one of the most powerful alternatives to a bankruptcy. They're amazing and so under-talked about," said Rajan.

Rajan says it's a negotiated settlement where the licensed insolvency trustee works out a deal between the consumer and the creditors to pay back a portion of the debt, interest free, over a period of up to five years. She says the creditors get back more than what they'd get through a bankruptcy but less than what's owing. 

Similar to a bankruptcy, a consumer proposal puts a stop to creditor letters and phone calls, judgments, wage or bank account garnishees.

Yet unlike a bankruptcy, you can keep most if not all of your assets, and there are no fees. The trustee is paid out of the payment the consumer provides to the creditors.

"So that's huge for people who maybe have quite a bit of equity in their home, maybe they have a decent car, got some other assets, but are still struggling, don't necessarily want to liquidate all that," said Rajan.

Rajan says a consumer proposal also impacts your credit report, though not as badly as a bankruptcy.

"But once you've completed it, you are able to qualify within two years for best rates and best terms. It's really not that bad."

Mounting credit card debt: what's the best way to dig yourself out?

Michelle, 59, lost her job, went back to school to retrain in a new field, and has accrued about $35,000 in credit card debt. She wants to know how to pay it off.  

"If I have to pay that credit card debt, I'll have to work till I'm 90 unless I claim bankruptcy, which I don't want to."

Jolie Viguers says the first thing Michelle needs to do is relax and know she is not alone and that there are solutions.

She says anyone in this situation needs to take full stock of what they owe and how much money they're bringing in, in order to create a budget.

Once that's laid out, Viguers says, people can start with two solutions: either bring in more money with a side hustle or cut back on expenses.

"It gets to be a very fine line as to how much we can trim out because it's not just the Starbucks that's throwing your budget out of balance," said Viguers.

Viguers and Rajan also suggest that people reach out to their creditors to try to secure a lower interest rate or set out a payment plan, because avoiding them will create more problems in the long run.

"'Here's my situation, let's help each other out, I don't want to have to go into a consumer proposal or a bankruptcy. I don't want to leave you hanging. I want to pay you back. But this is my situation,'" Rajan said of her suggested approach.

"They are much more likely to work with you versus when we are avoiding."

Rajan says when it comes to another option — debt consolidation — she cautions people to do their homework first.

It's not the same as debt forgiveness. 

Rather, she says you are borrowing money to pay off other borrowed money, so it's important to have an exit plan.

And they both caution against using a line of credit or tapping into home equity to pay off debt because that doesn't resolve the root issue.

"Or we're just borrowing from Peter to pay Paul and maybe getting ourselves into a little more trouble," said Rajan.

Are there general guidelines for how much to spend on rent, groceries, extras?

Viguers says the thing with personal finances is they are personal, so every household will have a different budget.

"But what I would say for most of my clients, whether they are coming to me with lots of debt, or they don't have any debt and they are trying to sort out their cash flow or investments, the No. 1 thing they come to me for is simply because they're not paying attention to their money."

Rajan says the word budget — or the "B" word, as she calls it — gets a bad wrap. 

So she says call it a spending plan or cash flow analysis, if that helps.

But she says at a time when she's hearing so much anxiety and worry in people's voices, she says it's important clients pore through their bank statements to understand their financial situation.

"Once you do it, it is so empowering. You know now what's coming in, what's going out, what can I do, and I am in charge of my dollars and where my money goes," said Rajan.

Texting with CBC Calgary

Last year, we launched a text-messaging effort to hear from Calgarians on everyday topics like the cost of food, utility bills and transit security.

We send regular updates and we value the ideas we hear back. That's where the idea for this Q&A came from, and we're also talking about housing in Calgary this fall.

To join, drop your cellphone number in the box below. It's free. Confidential. Unsubscribe any time.