As we head into challenging economic times, debt recovery litigation is likely to rise. For many, an individual's most substantial exigible asset will be their RRSP or RRIF. Recent legislative amendments to the British Columbia Court Order Enforcement Act extended creditor protection to some funds held in registered plans, including RRSPs, RRIFs, and deferred profit sharing plans ("DPSPs").
The amendments to the Court Order Enforcement Act create a general exemption against using the court order enforcement process to recover from designated registered plans (including RRSPs, RRIFs, and DPSPs, but not the newly introduced TFSA). The amendments then carve out limited exceptions to this general protection, permitting some rights of attachment. These exceptions may create uncertainty for financial institutions when responding to execution proceedings and also may create opportunities for lenders to preserve some of their recovery rights against a portion of registered plans.
The most important exceptions permit attachment of:
(a) Property contributed to a registered plan after or within 12 months before the date on which the debt being enforced came due; and
(b) Property that has been or is being paid out of a registered plan.
Other exceptions include proceedings to enforce family maintenance orders or those initiated against a registered plan before November 1, 2008.
Balancing an Early ‘Due Date’ with Limitations Issues
Financial institutions should consider their loan documents and standard practices to ensure that loan obligations can be said to come "due" at the earliest possible date to maximize recovery prospects. This could include a practice of favoring yearly ‘loan acknowledgment’ agreements with debtors rather than using ‘new notes’ to ‘refresh' demand loans.
Uncertainty on Execution Affecting Registered Plans
The 12-month execution exception also creates some uncertainty for financial institutions in responding to a garnishment, seizure or other enforcement process. Financial institutions should bear in mind that absent declarations of the court determining the date a debt came "due", or future clarification by the courts or legislature, such date, and, as a result, the amount of any designated registered plan subject to enforcement proceedings, may be unclear. In responding to enforcement proceedings against registered plans, financial institutions should require both confirmation and agreement of the affected parties or clarification from the court as to the due date of the debt being enforced.
In addition, as the change in legislation limits the ability of lenders to recover from designated registered plans, financial institutions may wish to reassess their risk on outstanding personal loans and their practice for assessing risks on personal loans in British Columbia.