Time To Change The RESP Rules for Bankruptcy?

Podcasts
Posted in Money Tips
Posted by J. Douglas Hoyes, CA, CPA, LIT, CIRP, CBV

resp-debt-free-post-updatedSubscribe and download at iTunes or using the Stitcher app, or subscribe via our rss feed or download directly, or listen now:

On today’s podcast we cover several issues around Registered Education Savings Plans including:

  • what they are and why you should invest in an RESP to save for your child’s education;
  • what happens to your RESPs if you file insolvency;
  • why the rules around RESPs and bankruptcy are different in Alberta than Ontario; and
  • what is happening with regards to recent legislation proposals surrounding RESPs and bankruptcy in Canada.

Today’s first guest was Mike Davies, a financial planner with IPC Investment Corporation in Brantford, Ontario.

Why are RESPs a Good Investment?

Registered Education Savings Plans allow a parent or grandparent to save money, tax free, for a child’s education, up to a maximum investment of $2,500 per year.  The federal government will make an additional contribution of 20% of your contribution, so by investing in an RESP you have a guaranteed rate of return of 20% in the year of contribution.  Extra government help is also available.

What happens if you have an RESP, and you also have debt?

As Mike Davies explains on the show, when money is taken out of an RESP and is not being used for the educational benefit of a child, the grant will have to be repaid to the government. Additionally, any growth in the plan will be subject to tax at your marginal tax rate plus an extra 20 percent. Think of it as getting your capital back, less any changes in the value of your investments. You should consult with your advisor to see if there any other costs involved.  So, if you are in debt and take money out of your RESP, you may end up with a big tax obligation.

Our second guest, Barton Goth, a bankruptcy trustee from Edmonton, Alberta, explains that the rules surrounding RESPs and bankruptcy are different in Alberta and most other provinces.

Due to a change in provincial legislation on April 1, 2014, RESPs are exempt from seizure in a bankruptcy in Alberta.  In Ontario, they are not exempt.  In simple terms, if you go bankrupt in Ontario you lose your RESP.  In Alberta, you don’t.

What should I do if I have debt, and have an RESP?

Every situation is different, so professional advice is a good idea.  One option is to file a consumer proposal, where you make a deal with your creditors, and get to keep your RESPs.   Contact the professionals at Hoyes Michalos for a free initial consultation to discuss your specific situation.

Should the RESP and Bankruptcy Laws Change?

It is not fair that the laws are different depending on whether you live in Alberta, Ontario, or another province.  In the final two segments of the show, Doug Hoyes and Ted Michalos both agree that the RESP laws should be changed to be similar to the RRSP laws.

Under current bankruptcy legislation, that applies in every province in Canada, Registered Retirement Savings Plans (RRSPs), are exempt from seizure in bankruptcy, except for your contributions in the previous year.  If you file for bankruptcy in Canada you can keep your RRSP, except for the contributions you made in the last 12 months.

Ted Michalos and Doug Hoyes both agree that the federal government should change the rules for RESPs to make them similar to the RRSP rules, so that most Canadians could keep most of the money they have saved for their children’s education, even if they file bankruptcy.  As Ted says in the show:

The young family that’s saving for one, two, three kids education in the future, it can make a critical difference, and if they haven’t got the money in the future, then it’s more likely than as a culture we’ll either be giving them grants or loans or some other way of funding that education.

If you have an RESP, and have debt, there are options, please  contact the professionals at Hoyes Michalos for a free initial consultation to discuss your specific situation.

Resources Mentioned in the Show

FULL TRANSCRIPT show #6 with Mike Davies

resp-debt-free-post-transcript

Doug Hoyes:  Welcome to Debt Free in 30 where every week we take 30 minutes and talk to industry experts about debt, money and personal finance. I’m Doug Hoyes. Today we are going to discuss RESPs, Registered Education Savings Plans.

Why in the world are we discussing investments on a show about debt? Two reasons; first, this is also a show about personal finance and if you have children or grandchildren, RESPs are an important topic. So to start the show, I’ve asked a financial advisor to explain all of the basics about RESPs. Then in the second segment, I’ll bring on a debt expert to explain what happens to an RESP if you get into debt trouble. So to start, I’m joined by a financial planner, let’s welcome him in, who, where do you work and what do you do?

Mike Davies:  I’m Mike Davies and with my business partner, Don Moffat, we are financial planners with IPC Investment Corporation here in Brantford.

Doug Hoyes:  So who exactly is Investment Planning Council, who is IPC?

Mike Davies:  IPC is a Canadian wealth management company with over $22 billion of assets under administration and over 900 advisors across the country.

Doug Hoyes:  Thanks, Mike, and welcome to Debt Free in 30. We are recording this today on location at 218 Brant Avenue in Brantford, Ontario so why am I telling you the address? Because Mike and Don’s firm, IPC Investment Corporation and my firm, Hoyes Michalos, both have the same landlord and we both have an office here at 218 Brant Ave. Our companies are not related but since I’ve bumped into Mike and Don in the office for the last 10 years, I thought they’d be good guys to have on to explain the investment implications of an RESP so that’s why Mike’s here today.

I’ll give my standard disclaimer here that what you are about to hear on this show are the opinions of my guest and you should not take any action based on what you hear today until you’ve researched this topic for yourself and if necessary, consulted with a professional advisor. So with that background, let’s get started. Mike, give me the basics. What is an RESP?

Mike Davies:  Well, simply put an RESP is a savings plan that can be used by parents or other family members to help pay for the educational expenses of their children after high school.

Doug Hoyes:  Okay. So what’s the point of an RESP? If I’m a parent or a grandparent or another family member, maybe an uncle for example, and I want to save for a child’s post secondary education, college, university or whatever, what makes an RESP so attractive?

Mike Davies:  Well, what is particularly attractive about this program is the federal government will make additional contributions or grant payments as they are known of 20 percent of your contribution but only up to a limit of $2,500 annually.

Doug Hoyes:  Okay. So give me an example here. So if I put a $1,000 into a qualifying RESP, what happens?

Mike Davies:  So in that example, the government is going to contribute an extra $200 for you by way of the grant.

Doug Hoyes:  Okay. So what about people who can’t afford to make a full contribution?

Mike Davies:  Well, recognizing that not everyone can easily afford to make contributions to an RESP, the government further assists people who have low to moderate incomes by awarding an extra 10 or 20 percent of grant money on the first $500 contribution. And further additional help may be available through the Canada Learning Bond which provides an additional grant of $500 in year one and $100 annually thereafter for as long as they qualify and are making contributions.

Doug Hoyes:  Okay. So that sounds good. Obviously the government is kicking in money into this program so let’s get into the nitty gritty of it here. What specifically are the rules? What do I need to get one of these RESP plans open?

Mike Davies:  Well, to open a plan, you’ll need a social insurance number for your child. All Canadian children are eligible to participate and receive the grant. And grant money can be received as soon as the children are born and the plan has been opened for them and can continue to be received until the age of 15 or age 17 if certain conditions are met. Any unused grant will accumulate annually so if you missed one  year of contributions but we’re able to double up in the next, you’d receive twice the amount of grant money.

Doug Hoyes:  So is there an annual limit on what can be contributed?

Mike Davies:  There is no annual maximum that can be deposited but you can only receive grant money on the first $2,500 of your contribution or the first $5,000 contribution if sufficient carry forward room exists. And there is a lifetime maximum contribution to the plan of $50,000 per child with maximum grant paid out of $7,200 per child.

Doug Hoyes:  Okay. So if I’m 40 years old, I mean, I wish I was still 40 years old, but if I was 40 years old and I get laid off and I want to go back to school, can I use an RESP to fund that?

Mike Davies:  RESP are opened with a child’s name attached to them so not directly,  but if this was the only way for you to get money to pay for your own schooling, you could collapse the plan, repay the grant money and get back the capital that you had originally invested. But another option, which may be better, is to withdraw money tax free from your RRSP under the governments life-long learning program and then repay the money borrowed from your RRSP at a later date.

Doug Hoyes:  Okay. So RESPs are really designed for younger people, not older people. There’s other things older people can do if education is what they’re looking for. So I guess education is getting pretty expensive now.

Mike Davies:  The cost of obtaining post secondary education is increasing all the time. Even today, it’s not unusual to hear that with tuition fees, books and the cost of accommodation, it can cost $10,000 each year for a four-year program. In fact, a report by TD issued in 2011, suggested at that time, a student living at home would have costs roughly $55,000 and if living away from home, $84,000. Even more worrying perhaps is that for children born at the time the report was written, by the time they attend university, the stay at home would’ve risen to $102,000 and if living away from home, they would’ve increased to a $139,000.

Doug Hoyes:  Wow, so it’s very expensive. So I guess anybody who is looking to be going to school should be certainly investigating those costs. So let’s go back to one of the first questions I asked. What then is the real point of an RESP?

Mike Davies:  So the point of an RESP is to encourage parents to start saving for their child’s education from a very early age. The combination of regular savings over an extended period of time plus the government grant money will help reduce the need for a more substantial payment when the child goes to school.

Doug Hoyes:  So if I’ve got a child or a grandchild and I want to save for their education, why don’t I just put the money in a savings account? This RESP thing seems like a lot of work, I got social insurance number, a whole bunch of stuff I’ve got to do. Wouldn’t it just be better to just stick it in some other savings vehicle like a savings account?

Mike Davies:  Well, that is one option. The disadvantage of that choice would be the loss of the 20 percent government grant on those contributions. It’s a far more attractive proposition to contribute say $1,000 and have the government kick in an extra $200 rather than leaving that on the table. Furthermore, investments inside an RESP grow tax free, whereas the interest earned in a simple savings account would be subject to tax of the parents marginal rate.

Doug Hoyes:  Okay. So this show is called Debt Free in 30, we talk about debt and issues relating to that so what happens if I get into financial trouble and I want to cash in the RESP before my child goes to school? What happens then, do I have to pay tax, what costs are there?

Mike Davies:  As discussed previously, when money is taken out of an RESP and is not being used for the educational benefit of a child, then the grant will have to be repaid to the government. Additionally, any growth in the plan will be subject to tax at your marginal rate plus an extra 20 percent. Think of it as getting your capital back, less any changes in the value of your investments. You should consult with your advisor to see if there any other costs involved.

Doug Hoyes:  Great. Thanks very much, Mike. I really appreciate you joining us here today. The point then is an RESP is a way for the government to help you save for a child’s education. They’re actually kicking money in to do it. It’s something that certainly should be considered, but as I said off the top, you’ve got to really crunch the numbers, talk to a financial advisor to make sure it makes sense for you. Mike, thanks for being here today.

Mike Davies:  You’re welcome.

Doug Hoyes:  Thanks.

RESPs and Bankruptcy

Doug Hoyes:  Welcome back to Debt Free in 30. Today we are talking about RESPs. In our first segment, we found out what they were, how they work, what the rules are. Now we’re going to talk about what happens to an RESP when you’re in debt. And so I’ve got an expert in the field here to talk about it. Can you please tell me who you are, where you work and what you do?

Barton Goth:     I’m Barton Goth. I’m from Edmonton, Alberta. I work at a firm, Goth and Company, Limited. This is a trustee and bankruptcy firm so we deal with people that have financial troubles on a daily basis.

Doug Hoyes:  Now, you’re from Alberta and that’s the reason that I wanted to have you here on the show because Alberta has, I believe, a different rule than anywhere else in Canada. Certainly different than the rules in Ontario. In Ontario, the rule is, if you have an RESP, and you go bankrupt, you lose that RESP. It becomes an asset of your estate so as the trustee, my job is to send a letter to the RESP company and say hey, send me the money. They’re not going to send me all the money. There’s going to be some government grants they have to give back and so on but you as the person in debt lose all that money. What are the rules in Alberta?

Barton Goth:     We used to have the exact same rule in Alberta up until April 1st of this year. Then things changed. They amended the Civil Enforcements Act of Alberta to make all RESPs exempt assets meaning if you file a bankruptcy in Edmonton or anywhere else in Alberta, this is not an asset that you are going to lose. It’s a protected asset. It’s something that you can retain and you don’t have to worry about dispersing amongst your creditors.

Doug Hoyes:  What’s your opinion on that? Is that a good thing, is that a bad thing? What are your thoughts on it?

Barton Goth:     Overall, I don’t disagree with the notion of exempting an asset that’s for the betterment of a child. It’s very difficult to sit there and know that you’re trying to set something aside and have done on a regular basis that’s going to hopefully improve the future economic status of someone that doesn’t really have much a choice.

In the same breath, there’s also the other side of the coin which I understand these monies are monies that are contributed by the debtor. These are monies that weren’t used to go to the creditors to pay down debts that obviously exist. So as much as there’s two sides of that equation, I tend to feel for the child who doesn’t have control. He didn’t make the decision. They didn’t choose to charge up the debts. They’re largely just a victim, if you will, of not having some of those opportunities that may have existed otherwise.

Doug Hoyes:  So we’re recording this in late 2014 so you’re saying that in early 2014 the law changed in Alberta. They are currently looking at potential changes to federal bankruptcy law which may or may not happen in 2015. It all depends on what the government does. What do you think the federal government should do? Should they make a law that applies in all of Canada similar to what is in Alberta now which is that RESPs are exempt, you don’t lose them if you go bankrupt. What do you think the federal government should do? If you have the opportunity to tell the federal government what to do, what’s your advice to them on this one?

Barton Goth:     Well, what I would suggest is I would suggest the amendments in Alberta are good amendments largely, although there are a few things that they haven’t thought of so I would encourage and I would support the notion of exempting those assets, exempting those RESPs, but I’d want them to be a little bit cautious because when you have an exemption that exists and you don’t have any controls associated with that exemption, there’s opportunities for potential abuse.

Right now for instance, if somebody came in January 1st to my office and asked me about bankruptcy and learned that there’s this exemption rule, there’s nothing preventing them from saying okay, let’s hold off and not file with Goth and Company. Let’s put some of my money that I would’ve lost otherwise into an RESP and maybe four months later I’m going to try another trustee and hopefully I’ll be able to keep those funds. Now, in practice, this doesn’t always protect those funds. If this gets found out, that very quickly is something that can be overturned but the opportunity is there. I would suggest to the federal government that they make a 12-month period prior to filing of a bankruptcy where any contributions to those RESPs would be something that can be clawed back, it would become beneficial to the estate or to the creditors of the bankrupt.

They do the exact same thing for an RRSP. There’s a federal exemption that exists for all RRSPs with the exceptions of that 12 month period immediately preceding the bankruptcy filing. And I would support something like that.

Doug Hoyes:  So when you go bankrupt now, if you put money into your RRSP, your registered retirement savings plan anywhere in Canada, any money you put in the last year, you can lose. The trustee can take that which prevents someone from going out and borrowing $15,000 on their credit cards, dumping it into the RRSP and then going bankrupt the next day. Anything that’s been in your RRSP for a year, is okay, you’re not going to lose it in a bankruptcy. You’re saying we should essentially have the same rule for an RESP, a registered education savings plan. Any money that’s been there for more than a year, if you go bankrupt, that money stays there, that becomes money for your child and that’s the way it should be.

Barton Goth:     I think that would be a good system to balance the rights of the creditors versus the rights of the child who largely hasn’t charged up these debts, yes.

Doug Hoyes:  Excellent. Great. Thanks very much for that, Bart. We appreciate it. This is Debt Free in 30. We’re going to take a quick break and then wrap up our show on RESPs. Stay tuned.

 30 Second Recap

Doug Hoyes:  Welcome back. It’s time for the 30-second recap of what we discussed today.

My first guest was Mike Davies, a financial planner who explained what RESPs are and how they work. He explained that they’re a great way for parents or grandparents to save for their child seduction because the federal government contributes 20 percent of your contributions so your education savings grow faster.

My second guest was Barton Goth, a bankruptcy trustee from Alberta who told us that unlike in Ontario, RESPs are exempt from seizure in a bankruptcy in Alberta. That means if you go bankrupt in Alberta, you get to keep your RESP. That’s the 30-second recap of what we discussed today.

So what’s my take on RESPs? There a number of issues here so let’s take them one at a time.

First, are RESPs a good investment? Well, yes, if you qualify, you should consider RESPs. As Mike Davies explained, the common scenario is a parent or grandparent who wants to save for their child or grandchild seduction. If you start when the child is young, the earnings can compound quite nicely.

As we discussed, there are two benefits to an RESP as compared to just putting money in a savings account. The government is giving you free money and the earnings accumulate essentially tax free. That’s a good deal. But this show is called Debt Free in 30 and we talk about debt, so let’s not forget the obvious point. Savings make sense if you don’t have debt. If you have debt, becoming debt free is almost always more important.

So let’s take an obvious example. Let’s say you’ve got a $1,000 in cash so should you put it in your child’s RESP or should you use it to pay down debt? Well, the $1,000 instantly becomes $1,200 inside your RESP because the government gives you a grant of 20 percent so on the surface, it would appear that investing in the RESP is the obvious answer. But if you have a credit card with a 20 percent interest rate, using the $1,000 to pay down your credit card by a $1,000 saves you 20 percent over the next years which is the same return as the RESP. So to answer the question about what’s better, contributing to an RESP or paying down debt, you have to crunch the numbers.

If you don’t pay down debt, how long will it take you to get out of debt? If you’re going to pay 20 percent on your $1,000 credit card for the next five years because you never pay down the principal, you’re just paying interest, then you’ll be paying a $1,000 in interest over the next five years. You only get the 20 percent grant in an RESP in the year you contribute so paying down the debt saves you interest forever.

To be clear, I’m not saying you should always pay down debt. I’m saying what I say on every show. You’re the boss. You need to decide what makes sense for you and your family. If you really want to contribute to your child’s RESP, great. Cut your expenses so you can do both, pay down your debt and invest in an RESP.

Remember, as I said in the show, as I record this in the fall of 2014, the law in Ontario is that you lose your RESP if you go bankrupt. So if you have debt and risk losing an RESP, you may be better off to either file a consumer proposal so you can keep your RESP or pay down debt and then worry about a registered education savings plan.

Of course there are lots of other factors to consider. If your child was just born, you have a lot of time to save for their education so perhaps you make small contributions now and use most of your resources to pay down debt. If your child is only a few years away from college, perhaps an RESP is important. Again, every situation is different. So you need to do your own research and decide what’s best for you.

That’s my take on whether or not RESPs are a good investment. So what’s my take on what the law should be for RESPs in a bankruptcy? On the podcast only segment of this show, I interview my business partner and Hoyes Michalos co-founder Ted Michalos who back in July 2014, submitted a report to the federal government advocating for changes to RESP rules. His comments are similar to what we heard from Barton Goth and they’re similar to my views.

I believe that RESPs should be treated the same way that we treat registered retirement savings plans in a bankruptcy. Under current Canadian law, if you go bankrupt, you keep your RRSP except for what you contributed in the last year. So if I have been contributing $1000 to my RRSP for the last 10 years and I now have $10,000 in my RRSP, I only lose the last $1,000 if I go bankrupt. I lose the last years contributions, I get to keep the rest. Why, because the federal government decided that it’s important for people to save for their retirement  but it’s also important that people don’t use the RRSP as a way to play games with the people they owe money to. You’re not allowed to put a pile of money in your RRSP today and go bankrupt tomorrow, that’s not fair. But you are allowed to keep the money you have saved in past years.

I believe that RESPs should be treated the same way. You shouldn’t be allowed to dump a pile of money into an RESP to keep it away from your creditors the day before you go bankrupt, but I believe that if you have diligently saved money over many years in an RESP, you should be able to keep it. After all, that money is there for the benefit of your children. They didn’t cause your debt problems so they shouldn’t suffer unduly when it comes to their education.

In my experience most people who go bankrupt don’t have a huge amount of money in RESPs so the big banks won’t lose much money if this rule is changed. We’ll see what happens when the government reviews our insolvency laws probably in 2015.

My hope is that the government acknowledges that saving is a good idea and saving for the benefit of your children or grandchildren is an even better idea. I think the one year rule is a good compromise. If you go bankrupt, you get to keep most of your RESP for the benefit of your children but the one-year rule prevents abuse of the system.

Will the rules change? Who knows, but just like we did back in 2008 when Ted Michalos and I traveled to Ottawa to testify before the government to argue for fair laws, we will continue to fight for what’s fair. Keep watching our website, we’ll post updates if there are any changes. For up to the minute updates, you can follow me on Twitter @doughoyes.

That’s our show for today. This show is on the radio every week and also available on our website and on iTunes so please go to Hoyes.com for a full list of radio stations that carry the show. We also have links and details so you can listen to the show on our website or download the show to listen on your iPod or Smartphone. Full show notes are available on our website and I’d love to hear your comments which you can leave right on our website at Hoyes.com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.

Thanks for listening to the radio broadcast segment of Debt Free in 30 where every week your host, Doug Hoyes, talks to experts about debt, money and personal finance. Please stay tuned for the podcast only bonus content starting now on Debt Free in 30.

Bonus Segment – Ted Michalos Tells the Federal Government to Change the RESP Rules

This is the bonus segment of Debt Free in 30. I’m Doug Hoyes and I’m joined by Ted Michalos. My business partner and Hoyes Michalos co-founder. We’re going to talk about the current state of the law when it comes to RESPs and bankruptcy. So on the second segment of the show, we had Barton Goth from Edmonton talking about the rules in Alberta which are, as of early 2014, that if you file bankruptcy, you don’t lose your RESP.

Now, Ted, in Ontario right now and I’ll tell everyone we’re recording this in the fall of 2014, it’s possible that the law will change which is what we’re going to talk about, but as of right now, if you go bankrupt in Ontario and you have an RESP, what happens?

Ted Michalos:  Well, unfortunately, the funds in that RESP will be collapsed and seized in other words to be given to your creditors.

Doug Hoyes:  So you go bankrupt, you lose your RESP. Now, back in July of 2014, the Office of the Superintendent of Bankruptcy asked for submissions from people as to what laws you think should be changed because every five years the government has to look at insolvency laws. So you wrote a detailed brief to them. One of the items you covered was RESPs, Registered Educational Savings Plans, and you recommended that the law change. You don’t believe they should be completely lost in the bankruptcy. So what first of all did you recommend?

Ted Michalos:  All right. So a little bit of background. Last time the government made changes to the act, they made RRSP contributions, so registered retirement savings plan contributions, that had been on deposit for more than 12 months exempt under the law. That means someone saving for their retirement, if they hadn’t put money in in the last 12 months, that money was safe. It would still be there for their retirement. And that makes a certain amount of sense from a policy perspective. You want people to save money for their retirement.  Well RESPs were created so that young families, people with limited means, could save money for their children’s or their own education in the future.

So it seemed inconsistent to me that we would be exempting money saved for retirement for the older members of our society and seizing funds for the younger members of our society. So the recommendation that our firm made was simply that RESPs be treated the same way as RRSPs. Money that has been on deposit for more than 12 months would be exempt from seizure and therefore available for these families when they need them in the future.

Doug Hoyes:  So what you’re recommending, someone goes bankrupt, they get to keep their RESP except for what they put in in the last 12 months. So why that last 12 month thing? Why is that in there?

Ted Michalos:  The only reason I put that in there is to be consistent with the existing law, and the reason they put it in the existing law for registered retirement funds is so that people don’t get cute. I mean, it’s possible that you could take large cash advances on your credit cards or lines of credits or loans, dump the money in an RRSP and if that 12 month rule wasn’t there, they might be exempt under the law. So this simply makes sure that people have had the money on deposit for a significant period of time. It wasn’t a planned event.

Doug Hoyes:  And so what you’re trying to do is balance two different factions here in effect?

Ted Michalos:  That’s exactly right. The Bankruptcy and Insolvency Act is always about balance. You’re trying to give the honest but unfortunate debtor a fresh start while maintaining the rights of the creditors. Somebody has to pay for this money that’s been borrowed and it’s a balancing act about where does the money come from.

Doug Hoyes:  So you think the 12 months is a suitable requirement. So let me take the side of the creditors then, the people who are owed money. They’re all saying well wait a minute, on your current law, someone has money in an RESP, it gets collapsed, we get that money. If these new rules that you’re proposing come into place, we won’t get that money. Is this going to be a huge thing that they’re going to all complain about? Do you see a lot of people who go bankrupt, who have a lot of money in RESPs?

Ted Michalos:  I don’t see there being any significant blow back for this. The amount of money that’s traditionally cashed out of an RESP might be a couple of thousand dollars at most. It doesn’t represent significant dollars to the financial community; the major banks in Canada, the credit card companies, the lenders aren’t going to miss that money. Certainly, they’d like it but they’re not going to miss it. Whereas the young family that’s saving for one, two, three kids education in the future, it can make a critical difference, and if they haven’t got the money in the future, then it’s more likely than as a culture we’ll either be giving them grants or loans or some other way of funding that education.

An interesting side note of course is the RESP funds on deposit are almost always held with financial institutions so to some extent, there’s a benefit to them in allowing the money to stay on deposit. It’s the same argument they made with registered retirement savings plans. They wanted the money to be exempt so that it would be there and available and still in their portfolios. The same logic applies to RESPs.

Doug Hoyes:  I put my money with a bank into an RESP or an RRSP, they’re paying me interest at one or two percent but that’s money they can then turn around and loan to somebody at a higher rate for a mortgage or a loan. So even though they’re going to lose a bit if these funds aren’t given to them in a bankruptcy, there’s still a pool of money there that they’re probably still making money on. So we don’t have to worry about the banks is what you’re saying.

Ted Michalos:  That’s exactly right. And to kind of give you some prospective, the average person who files owes somewhere in the $60,000 – $70,000 in unsecured debt and my guess is the average RESP that we cashed out because they don’t appear in every bankruptcy, might only amount to $500 or $600 on average.

Doug Hoyes:  Yeah, and that makes sense because I had $50,000 in my RESP, then probably I’d say okay, I better pay my debts off with it. It’s not something I’m going to — you’ve got a lot of money if you’ve got that much money in an RESP, you’re probably not in serious financial trouble either.

Ted Michalos:  Well, and by extension, people know that the current rules are that as a trustee, I will seize it if you file bankruptcy so if they are going to collapse some sort of investment before they file, likely it would be the RESP anyway.

Doug Hoyes:  Yeah, it’s money you’re going to lose anyways, so okay if in the two or three months before my bankruptcy, I’m getting behind on my rent payment or something, oh well, might as well cash the RESP in because I’m going to lose it anyways. Obviously, we’re not recommending people do that because when you go bankrupt, if you did cash an RESP in or any other investment right before bankruptcy, what happens? What are the implications?

Ted Michalos:  Well, the risk is that we’ll look at what you did with the money and say perhaps it wasn’t appropriate. So in the example that you just gave, I cashed out my RESP and I paid the rent. As a trustee, that wouldn’t bother me too much. But let’s say you cashed it out and you put $1,500 on the debt that you owed your Uncle Bob. That would probably be something that we would look at carefully and likely I’d contact Uncle Bob and say well, you need to pay that money back because you were treated better than all the other creditors.

Doug Hoyes:  An obviously if it was $15,000 or $20,000 in the RESP and you paid one creditor but not the other than it becomes even more of a serious issue.  So I guess the bottom line is it’s not a big asset from the point of view of the banks right now so they shouldn’t really care about it. It’s really not a huge asset when it comes to bankruptcies in general because most people who are in dire financial needs have probably cashed it in already. What we’re trying to do is encourage savings. We both believe that’s a good thing. And looking forward to the future is a good thing so by changing the rules, that gives a good balancing act. That’s really what we’re talking about.

Ted Michalos:  That’s exactly right.

Doug Hoyes:  Excellent. Well, thank you very much, Ted. That’s the bonus segment here on Debt Free in 30 with RESPs. I think we’ve covered all the basics. But if you want more information, you can always go to our website at Hoyes.com. This was Debt Free in 30.