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.
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?
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.
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!
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.
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?
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.
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.
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.
My husband declared bankruptcy in 2015. Can be be a subscriber to RESPs while still in bankruptcy?
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.
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?
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.
In a consumer proposal, do you lose tuition and education amounts?
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.
Please help me! I have been discharged for almost 4years now, from my bankruptcy. I openly put down all my assets, being nieve to the whole situation since my ex used to deal with all our paperwork, I even brought in all my jewelry including my wedding rings (lol) assuming I had to hand over EVERYTHING! But now, almost 4 years later, I’m being asked to sign over my boys RESP’s, is this normal, do I have to sign them over? I feel like a shmuch, since the boys are almost at the age to use them, and my ex kept reminding the boys that we have the RESP’s there for them to use! I’m lost on what to do!
RESPs are not protected under the law the way RRSPs and life insurance are. When a person files for bankruptcy they can be seized and cashed out. Having said that, why are they asking to cash them out 4 years after your bankruptcy? That is quite unusual unless the funds were in some sort of locked in GIC that is only maturing now. Your bankruptcy is entitled to the balance in the RESP as at the date you filed. You can make an argument that any increase in value since that date should be left in the funds for your children’s benefit. Might work…
You should focus on obtaining an explanation as to why you are being asked to sign anything four years after your discharge – it really doesn’t make sense.
Hi. What hapenning with Grants money in case of Bancrupcy. I hold my RESP with investment company. As per request bancrupcy trustie received all contribution amounts. Do I have to contact goverment in order to return grants?
If your RESP is being cashed out there are specific rules as to who receives what. Ask the company holding the funds what your cash surrender value is – the rest is being returned to the the government in one way or another.