College tuition is on the rise in almost every campus across the United States, which makes saving for college an essential part of rising kids today. When exploring bankruptcy you may be wondering what will happen to your child’s college savings accounts? Well the answer to this, like most bankruptcy questions, is somewhat complicated and dependent on numerous factors. The broad answer would be, yes, some college savings accounts can be protected through a bankruptcy exemption, while others will not be afforded that protection.
In order to determine if your child’s college saving account will be protected in a bankruptcy action, your bankruptcy attorney will need to review the following aspects:
- What type of savings account is it?
- When was the savings account created and funded?
If your child’s savings account is held in a traditional bank savings account, a brokerage account or other non state-run program it will not be excluded from a bankruptcy filing and therefore not protected. This includes funds that were gifted to your child from relatives because you are the account owner and in control of the funds within it.
Are 529 Plans Exempt In Bankruptcy?
On the contrary a 529 college savings account can be protected under US Bankruptcy code. What is a 529 Plan? In the late 1990’s the IRS created a savings plan that would allow parents to put money into a savings account that could be spent on a child’s future educational needs. Most 529 plans are funded with pre-tax dollars and as long as the child uses the money for education expenses it will not be taxed when it is used. 529 plans are state sponsored and some states offer a tax deduction associated with the account. While California does sponsor a 529 plan it does not offer a tax deduction. 529 plans are a good option for college savings funds but beware they do have strict guidelines on how the money may be used.
As mentioned above, 529 plans can be protected in a bankruptcy filing but timing is of the essence. The Ninth Circuit Court of Appeals ruled in 2009 that money invested in a 529 plan in the year prior to a bankruptcy filing will not be protected. The court went on to rule that money added between one and two years would only be afforded protection of up to and including $5,580. Money invested in a 529 plan more than two years prior to the bankruptcy filing would is fully protected by bankruptcy code 11 USC Sec. 541(b)(6). As you can see a 529 plan provides asset protection for college funds at various levels given the time money has been invested and 529 plans are protected from creditors in California following the same timing guidelines.
Lastly, you need not worry about losing your child’s savings account with a Chapter 13 bankruptcy filing, as your assets will only be seized and taken by the trustee in a Chapter 7 bankruptcy case.
All areas of the law are quite complicated and bankruptcy is definitely not an exception. Bankruptcy codes are full of rules and regulations and there are multitudes of ways in which you can craft a bankruptcy to best benefit your situation. If you would like to explore your bankruptcy options and how to protect your child’s college savings accounts, contact Goldbach Law Group for a free consultation.