RESP and Bankruptcy: Protecting Your Child’s Education Funds

A Registered Education Savings Plan, or RESP, is a savings account designed to help parents save for a child’s education after high school.   People usually set them up for their children or grandchildren. 

There are two main benefits to stashing away your money in an RESP for use later by your child:

– The Canadian government matches 20% of your annual contributions up to $500 per year to a lifetime maximum of $7200. 
– RESPs are tax-sheltered savings plans.  So any investments in the plan grow tax-free until they’re withdrawn.

Once enrolled in an eligible post-secondary program (such as a university, community college or apprenticeship) the student (known as the beneficiary) will receive money in amounts the parents control to help cover the costs of their education expenses.

Because a RESP is set up by, and registered in the name of, a parent, it is considered an asset of that parent.  This means filing for protection from companies you owe money to through the bankruptcy process can have a big impact on the RESPs in your name. 

When you file a bankruptcy, you effectively hand over all your assets to the Licensed Insolvency Trustee (known as the LIT) in return for the elimination of your debts. The Trustee will then cash in and take your contributions to the RESP as an asset of your bankruptcy estate.

That’s the big difference between a protected asset, such as a Registered Retirement Savings Plan (RRSP) or a Registered Disability Savings Plan (RDSP) and a non protected asset such as an RESP.   The money placed in the RESP plan is not in trust for your children but is an asset that can be cashed in to pay off your debts to the creditors (the companies you owe money to). The Trustee is required under the Bankruptcy & Insolvency Act to recover the net value of the RESP for distribution to your creditors. 

There is some good news when it comes to RESPs.  Your Trustee will allow you to buy the RESP back from the bankruptcy estate. This allows you to:

– keep the grants portion received from the government
– avoid any of the costs and penalties associated with cashing them out

Before you speak with the LIT it’s often a good idea to reach out to the company managing your child’s RESP account and ask them to provide you with a statement detailing:

– Your contributions made to the plan
– The amount of government grants received
– Investment gains (if any)
– The penalties that have to be paid if you were to cash out the plan
– The net amount payable to you.

The net amount payable to you is the value that you would pay the Trustee to buy back the RESPs from the bankruptcy estate.  Normally the Trustee will allow you time to do so.  

One more thing to keep in mind:  It’s not unusual for spouses to set up a RESP for their children together, which means the RESP account would be registered in both parents’ names.  If that is the case and you have to explore filing a bankruptcy to protect yourself from the companies you owe money to, you would only be responsible for the net value of your share of the RESP (i.e. 50% in joint ownership in most cases). 

We encourage you to reach out to our licensed insolvency professionals with any questions you might have about RESPs or any other asset, such as a matrimonial home or vehicle.  We can help you explore all the options available to you and recommend the right approach for your unique situation.