Should RESPs be Protected From Creditors?

A brief introduction to RESPs

RESPs (Registered Education Savings Plans) enable parents or grandparents to save towards their child or grandchild’s education.

If you put money into an RESP, the government will boost the fund by adding a contribution.

A survey conducted by Ipsos suggests that around 50% of parents of children aged between 14 and 17 years old are taking advantage of RESP programmes. 

RESPs and bankruptcy

If you’ve been putting money into an RESP for your child or grandchild, it’s natural to be anxious about what will happen to the fund if you file for bankruptcy.

Unfortunately, in most cases, RESPs are not protected from creditors.

Exceptions apply in Alberta, where RESPs have been added to the list of exempted assets. 

For Canadian residents who don’t live in Alberta, the prospect of losing money that is designed to benefit a child or grandchild is distressing.

Although it is possible for creditors to access these funds, in reality, RESPs are seldom jeopardised when an individual files for bankruptcy in Canada.

The main reason for this is that RESPs are not as common as other types of funds and plans, including tax-free savings accounts and RRSPs (Registered Retirement Savings Plans).

In addition, it is possible to buy back an RESP, which represents an alternative to cashing it in as part of a bankruptcy agreement.

In this case, the individual would agree to pay the creditor the cash-out value of the fund instead of closing it down.

Keeping the RESP intact is beneficial due to the government contributions. 

Should RESPs be protected from creditors?

Alberta’s move to protect RESPs from creditors has undoubtedly prompted questions over whether this type of fund should be shielded in the event of an individual filing for bankruptcy.

It seems unfair that one person will be treated differently to another based purely on where they live.

For now, the situation remains the same, with Albertans protected and other Canadian residents at risk of losing their RESP.

The RESP is attractive because it offers parents the opportunity to benefit from government contributions when saving for their child’s education.

The aim is to build up savings so that the child can benefit from the best education possible.

While other types of plans are protected from creditors, including the RRSP, the RESP can be seized outside of Alberta. 

If you’re facing the prospect of losing the funds in your RESP, it’s wise to seek help.

There is an option to buy back RESPs.

In this case, you would eliminate the risk of reducing the cash value and incurring cash-out fees.

Another option, which may appeal if the fund has a high value, is filing a consumer proposal.

This is an alternative to bankruptcy, which involves drawing up a proposal with a licensed insolvency trustee (LIT).

The aim is to come to an agreement that is mutually beneficial for the individual and their creditors. 

Summary

If you’re worried about debts, or you think you’re going to lose your RESP as a result of bankruptcy, it’s crucial to seek expert advice.

RESPs are not protected from creditors unless you live in Alberta, but there may be solutions and alternatives available to you. 

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