When you file for bankruptcy, you have to hand over your assets and in return, your outstanding debts will be eliminated.
However, there are certain exemptions to protect you, so you don’t lose everything.
For example, your home and your furniture cannot be reclaimed, and neither can personal items such as clothing.
If you own tools that you require for work, they cannot be claimed either.
Unfortunately, RESPs (Registered Education Savings Plans) are not on any of the federal or provincial exemption lists, and if you declare bankruptcy, your RESP will be recovered during the process.
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The good news is, that doesn’t necessarily mean that they will be cashed out right away and you do have some options to preserve your RESPs.
If you want to know how to preserve an RESP in a bankruptcy, this article will give you all of the information that you need.
If your RESP is recovered during the bankruptcy process, you have the right to offer to buy it back from your trustee.
You can pay a cash amount equal to the value of the RESP.
The penalties involved with cashing out an RESP early are very severe, and in many cases, you could lose up to 50% of the cash value.
The buy back option is strongly encouraged to help you avoid this and retain the full value of your RESP.
If you want to make an offer to buy back, you will first need to know the value of your RESP.
If you contact the company that holds the funds and ask for this information, they will send you a letter with details of the face value of the plan, the penalties that you will have to pay if you cash out, and the amount that will be paid to you.
The amount paid to you is what your trustee will recover, so if you want to keep the RESP, you need to match this amount rather than the face value of the entire plan.
If you have a very high value RESP and you are concerned about losing it, you should consider a consumer proposal instead of a bankruptcy.
When you opt for a consumer proposal, you do not have to turn over any of your assets, and instead you offer to repay a portion of the debt over a set period of time.
The amount that you offer to pay back must be higher than the amount that your creditors would recover if you went bankrupt, but the payments can be spread over 5 years and your assets are protected, so it is the best option in many cases.
If you are not concerned about your RESPs, you can simply instruct your trustee to contact the company that holds the funds and cash them out.
If you are planning on filing for bankruptcy, you should always consider the exemptions and ensure that important assets, like RESPs, are sufficiently protected.
Should you need more information on how to preserve an RESP in a bankruptcy or more general information about your different debt relief options, get in touch today.
You can reach us on the phone or fill out an evaluation form and we will get back to you.
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