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
You 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.