A Registered Education Savings Plan (RESP) is a savings account for a child’s education after high school. Parents contribute to the account over many years, and the government will also contribute through grants.
Needless to say, when you’re saving for your child’s future, you will want to protect it if you possibly can.
Will I lose my RESP if I file for bankruptcy?
When you file for bankruptcy in Canada, some assets are exempt from seizure, and you can keep them.
Unfortunately, an RESP isn’t exempt and must be seized by the Licensed Insolvency Trustee that handles your bankruptcy. This is because you can collapse and cash out an RESP at any time.
If you decide to declare bankruptcy, your trustee will contact your RESP administrator to determine the cash value of the RESP.
It’s worth noting that if you collapse an RESP, the government grants are returned to the government, and your RESP administrator will probably charge a fee.
So, this cash value would be the amount after admin fees and once any grants are returned to the government.
Can I keep my RESP if I declare bankruptcy?
Here’s the good news. If you want to keep your RESP, you can make a payment equal to the cash value of the RESP to your Licensed Insolvency Trustee to essentially repurchase it from your bankruptcy, instead of collapsing the plan.
Alternatively, if you are not interested in keeping your RESP, you can ask your trustee to cash out the plan.
Get RESP advice from a Licensed Insolvency Trustee
Always ask a Licensed Insolvency Trustee how an RESP will be affected in bankruptcy.
In some provinces, there are differences in how savings are treated in bankruptcy.
For example, you can keep an RESP if you file for bankruptcy in Alberta.
Will I lose any other assets?
There are indeed other savings that might also be at risk if you declare bankruptcy.
That said, there is also a list of items that you can keep, called bankruptcy exemptions.
Because these items occasionally change, always speak to a Licensed Insolvency Trustee for the most up-to-date information.
Why file for bankruptcy?
Bankruptcy is a debt relief solution best suited if you have low or no income, have no assets, and cannot pay off your debts as they become due.
When you file for bankruptcy, you surrender your assets to a Licensed Insolvency Trustee in return for legal protection from your creditors and help to clear your unsecured debts.
Alternatives to bankruptcy
If your RESP is of high value, you might want to consider filing a consumer proposal instead of bankruptcy.
A consumer proposal is a popular alternative if you don’t want to surrender your assets to a trustee.
Instead, you will agree to pay back your creditors at a reduced amount over time and consolidate your debts into one affordable payment.
Although you will pay more than you would in bankruptcy, the payments can be spread out over a longer period, even up to five years.
See also: Pros and cons of a consumer proposal
Naturally, you want to protect your RESP at all costs, even if you file for bankruptcy.
Although it is not exempt from seizure when you file, you have the option to repurchase the RESP from your bankruptcy or cash out the plan.
In some cases, a consumer proposal could be a better option if you have valuable assets that you want to protect.
If you have any questions regarding an RESP and bankruptcy, let us connect you with a Licensed Insolvency Trustee today for a free, no-obligation consultation.
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