Personal Bankruptcy And Registered Education Saving Plans (RESPs)
As you can imagine, there are many factors to consider when deciding to file for bankruptcy.
Such a life-changing decision is not one that should get taken lightly, and so it makes sense to think about everything that can impact your bankruptcy or your financial future.
Do you have one or more children?
And do you make regular contributions to a registered education saving plan (RESP) for them?
If the answer is yes, you must read this page in its entirety.
Here’s what you need to know about bankruptcies and RESPs:
RESPs aren’t trusts
You already know the advantages of RESPs for children, such as matched contributions up to 20% by the Canadian government.
Given that RESPs are state-sponsored savings vehicles, why would they get affected by bankruptcies?
The answer is simple: RESPs aren’t trusts.
Parents set up RESPs and administer the plans on behalf of their children.
Those parents can also choose to “cash-out” any money in those plans at any point.
Because RESPs aren’t true trusts, they are considered assets by licensed insolvency trustees (LITs).
Those trustees are responsible for setting up and administering bankruptcies on behalf of debtors and creditors.
The impact of RESPs on bankruptcies
Have you got a RESP for your offspring?
And are you thinking of filing for bankruptcy?
If so, what should you do?
The first thing you should know is that your LIT will request that you “collapse” your RESP and cash-out the plan.
As you can appreciate, that’s not the best outcome for your RESP.
Especially as you put the money away for the future education of your offspring!
Administration fees will get deducted, along with all government contributions, to add further salt to the wound.
Whatever gets leftover from those deductions will become included in the payments to your creditors as part of your bankruptcy.
How you can protect your RESP
It might seem like there’s nothing you can do to protect your RESP when filing for bankruptcy.
However, there are two options available to you to ensure you still have money to pay for your child or children’s future education needs.
Option #1: repurchase your RESP
You may not know it, but it’s possible to repurchase from your LIT the RESP you initially set up.
In that scenario, your LIT will add the cost of your RESP to the monthly bankruptcy payments that you make.
Option #2: consider a consumer proposal instead of bankruptcy
When tackling massive debt problems, bankruptcy isn’t the only way forward.
You could opt for a consumer proposal instead, a form of insolvency with flexible terms.
All assets don’t get considered for inclusion when setting up a consumer proposal, and your RESP is safe.
Bankruptcy or consumer proposal: which is best?
If you’ve not yet filed for bankruptcy, it makes sense to discuss your case with our expert team on (877) 879-4770.
All calls are confidential, and there’s no obligation to file for bankruptcy or a consumer proposal with us.