Impact on my childs RESP if I file bankruptcy

by Anonymous on January 13, 2011

met with a trustee last week. We spent about an hour talking about a bankruptcy. I think I understand the process, but what I don’t understand is my daughter’s RESP. If I understand things right my daughter looses her RESP’s if I have to file a bankruptcy. This doesn’t make sense to me. This money is not mine, it came from her Child Tax Benefit cheques. I have taken all this money since she was born and set it aside for her education, it is the only good financial choice I have made. She is now 15 years old, and I think we have about $15,000 in there. How can she loose that moneyh? This is set aside for her to go to university and without it she might not be able to afford to go to school after grade 12.

Is this right? Do I understand things or did I just misunderstand things?

bartongoth January 24, 2011 at 4:41 pm

Unfortunately you are correct. Under the current laws if you file for bankruptcy any RESP funds are collapsed and the monies are distributed among your creditors. While I agree it doesn’t make sense and our recommendation to the government in this last round of legislative amendments to the Bankruptcy and Insolvency Act (BIA) was to make all RESP’s exempt, this wasn’t a change that was made. So as it sits all RESP’s are lost if a bankruptcy is filed.

The other argument that many have is that this isn’t really the parents money, it is earmarked for the children, so it is really should be looked at as the child’s asset. Unfortunately this argument doesn’t work either because of the way that the RESP has been set up. It is an investment of capital that is made in the parent’s name with the intent of it going to the child if and when they attend a post secondary institute. There are two problems with this. First it doesn’t becomes the child’s money until they attend a post secondary institute, and second, it can be collapsed by the parent any time prior to that. As a result of these two problems the funds do not meet the definition of true trust property that is set out in the BIA and this argument doesn’t work either.

What we find is there are really only two ways for you to be able to retain these funds. First, you may want to consider filing a consumer proposal as opposed to a bankruptcy. The advantage of this route is there is no vesting of property in a proposal like there is in a bankruptcy, so the result is the RESP remains intact. The second option is that if you do file for bankruptcy you can make arrangements to re-purchase the RESP from the bankruptcy estate. As these can be a little complicated to explain in this venue, if either of these sound preferable, then you are best to discuss them with a local trustee directly.

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