How To Preserve An RESP In A Bankruptcy

Category: Personal Bankruptcy (14) comments

When you file bankruptcy in Canada you sign over the things that you own in exchange for the elimination of your unsecured debts subject to some exemptions.  The bad news is that RESPs, or Registered Education Savings Plans, are not on any of the provincial or federal bankruptcy exemption lists.  If you own RESPs and you file for bankruptcy then your trustee must recover the fair market value of your RESPs as part of your procedure.

That doesn’t necessarily mean your RESPs will be cashed out.

“Buy Back” Option

resp and bankruptcyYou have the right to offer to pay an amount equal to the cash value of your RESPs to your trustee to “buy them back” from your bankruptcy.  This is something that is strongly encouraged because the penalties associated with cashing out an RESP often reduce the cash value to 50% or less of the face value of the RESP.

In order to determine the cash value of your RESPs you need to contact the company holding the funds.  They will provide you with a letter detailing the plan’s current face value, the penalties that would have to be paid in order to cash out the plan, and then the amount that will be paid to you.  It’s this final amount that your trustee is required to recover and it is the amount you will be expected to pay if you want to keep the RESP.

Consumer Proposal Option

Of course, if your RESP has a high cash value, you may want to consider filing a consumer proposal instead of filing bankruptcy.  When you file a consumer proposal you don’t sign over the things that you own to eliminate your unsecured debts, rather you offer to repay a portion of what you owe over time.

The catch? You always have to offer to repay an amount greater than what your creditors might receive if you were to file bankruptcy.  This payment however can be spread out over period of up to 5 years.

A consumer proposal is worth considering if you are worried about losing your RESPs or other assets.

If you aren’t interested in keeping your RESPs then you can simply instruct your trustee to contact the company holding the RESPs authorizing them to cash out the plan.

Each province and the federal government has an established list of items that are exempt from seizure in a bankruptcy and you need to review these lists in detail before you decide whether or not bankruptcy makes sense for you.

If you have questions about your RESP and bankruptcy, or any other assets or investments and how they are treated in a bankruptcy or proposal, contact a Bankruptcy Canada trustee today.

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  1. Katie

    I have a question about RESPs and bankruptcy. The RESP is for my young daughter, not myself. Would it still be signed over if I file, or would it be secure since I am only contributing to it?

  2. J. Douglas Hoyes

    Since you “control” the RESP, it is considered to be your asset, even though it is in trust for your daughter, so it is an asset you would sign over in the bankruptcy.

    However, there are a number of strategies to allow you to keep the RESP, so I suggest you contact a local trustee to review your RESP in detail and show you how it may be possible to keep it.

  3. Kendra

    I have a question about RESPs and bankruptcy. My mom is the account holder of my 3 kids RESPS if i consider going bankrupt will that effect the RESPS seeing i’m their legal guardian? She makes all the contributions and i have nothing to do with it other then being their mom!

  4. J. Douglas Hoyes

    Hi Kendra. If the RESP’s are in your mother’s name, and she has made all of the contributions, then your mother is the legal owner of the RESPs, so your going bankrupt would have no impact on the RESPs.

  5. Gia

    I have a question about RESP’s and Bankruptcy. My parents hold a RESP for me in there name. If I file bankruptcy and want to use the RESP and go to school during my bankruptcy how does this effect me? I know that I have to pay the taxes on the RESP amount I use. Would it be considered income even though I am using it to go to school? Do I have to pay surplus on the amount I take from the RESP for school? Will this extend my bankruptcy from 9 months to 21 months?

    1. J. Douglas Hoyes

      This is a question you should discuss with a bankruptcy trustee before you file, so that they can review all paperwork to give you an informed answer.

      It would appear that the RESP is owned by your parents, and therefore is not your asset, so you would not lose it if you went bankrupt. If you went to school and your parents, via the RESP, paid your tuition directly to the school, there would be no income to you during the bankruptcy, since you did not receive the money.

      Again, this is a complicated area, and so it would be wise to have a trustee review all of the facts to give you a more specific answer.

  6. Maria

    I have a question about RESPs and bankruptcy. My husband and myself are account holders of our kids RESPs. My husband is planning to file bankruptcy and we know we will lose the RESPs. But if we prove through bank statements that he has never contributed to the RESPs and I was the sole contributor, would I be able to keep them (he has all the debts, it’s not joint). Same for the current house, if we sell it and prove that mortgage payments have always come from my account, do I get to keep my share of the equity and more as I am on the Title but not on the debts that he has.

    1. Ted Michalos

      Without a lot more detailed information I can’t provide you with a specific response. If the RESPs are shown as being in both you and your spouses name then whatever trustee he is dealing with will likely demand 50% of the value of the funds. Proof of payment is not likely to persuade them. Of course, instead of cashing out the RESPs, your husband could agree to pay an amount equal to his “half”. This would leave the RESPs for your children (but increase the amount your spouse would be paying for the bankruptcy). If you own the house joint and severally (ie both of you on title) then again, your spouse’s trustee will likely expect 50% of the net proceeds form the sale of the house. This is definitely something you should discuss with his trustee BEFORE your spouse files so there are not surprises and you can put a plan in place to deal with the house.

    1. J. Douglas Hoyes

      If he has been bankrupt for three years there are probably serious issues with his file, so I would not be creating assets at this time.

      However, if he is discharged from bankruptcy, and you are asking because the bankruptcy still shows up on his credit report (which it will for about 7 years), then yes, there is no reason why he can’t start an RESP.

  7. Kelly

    I am paying back a consumer proposal and have a small amount of RRSPs. I am wanting to go back to school to improve my career. Am I able to cash that RRSP in without causing any issues with my proposal?

    1. Ted Michalos

      Unless the RRSPs were somehow restricted as a term of your proposal (which would be highly unusual) then you are free to deal with them as you see fit. Good luck at school.

    1. J. Douglas Hoyes

      Hi Nord. If you are referring to tax deductions, assuming you have no other debt with CRA, the consumer proposal does not impact your tax deductions. Your trustee can review and explain in more detail how these amounts would be impacted in your proposal.


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