Thanks to a change in legislation, the choice of whether or not to declare bankruptcy to get rid debt in retirement has become a lot easier.

A bill amending the Bankruptcy and Insolvency Act will protect registered savings plans and income funds from the hands of creditors. The bill (C-12) has been passed into law but most of it is not yet in effect, although that is expected to happen soon, says Robert Klotz, a lawyer who specializes in bankruptcy for Klotz Associates in Toronto and a member of the Personal Insolvency Task Force.

The amendment was designed to create parity between pensioned workers — whose pensions are exempt from creditors — and self-employed individuals, including professionals, who had no such protection.

But it could create problems, as some people might unfairly take advantage of the change, Klotz says. Some people might sock away as much as possible in their RRSPs before entering bankruptcy, in an effort to beat the system.

The bill’s amendments have no lock-in provision that ensures the savings will be used for retirement, Klotz says. For example, a 45-year-old with $200,000 in his RRSP could declare bankruptcy, then cash it in and take a Florida vacation. “It’s like a bank account,” he says.

Nor do the amendments provide enough protection against fraud, Klotz says. An unscrupulous person might borrow a large sum, deposit it into an RRSP and then declare bankruptcy. Tracing and recovering the RRSP funds or proving fraud would be difficult and costly for creditors.

Consumer bankruptcies have been climbing steadily since the 1960s, although the average annual rate of increase has dropped in recent years, thanks to an increasing number of consumer proposals that debtors often prefer over bankruptcy. But the C-12 amendments may well turn that tide.

“There’s going to be a bit of a wave of bankruptcies, once people realize how hard it really is to get out of debt,” says Darrell Starrie, president of Strategic Financial Concepts Inc. and director of Dundee Securities Corp.’s private client group in Edmonton.

Starrie has had a few clients who, because of unexpected — and, sometimes, tragic — circumstances had no other way out. The stress of trying to pay back debt was overwhelming them and they had no other choice. “[Bank-ruptcy] is not the worst thing,” he says. “These days, it’s a financial move.”

Still, he says, it would be irresponsible for an advisor to recommend clients take on more debt than they can handle in order to top up their RRSPs before declaring bankruptcy.

The potential for abuse doesn’t mean the original act shouldn’t be changed, Klotz says. There is a need to level the playing field for those who have protected pensions and those who don’t, especially because the number of Canadians without pension savings is growing.

Almost one-third of families have no pension savings, according to Statistics Canada. And because bankruptcy is a legitimate option for some, Klotz says, those without pensions need some protection for their retirement savings.

The stigma traditionally associated with bankruptcy has disappeared.

“People tend to be coldly rational,” Klotz says. “They’ll look at the situation if they go bankrupt vs the situation if they don’t. And if it’s 10¢ one way or the other, well, why not?” — WENDY CUTHBERT