Filing for bankruptcy is a complex decision. However, parents who have been actively savings for a child’s education are usually worried about protecting a 529 Plan. These tax-advantaged savings accounts, which operate like mutual funds, encourage families to save for future college costs and can significantly impact a child’s life.
Qualified state tuition programs, also called “529 plans,” are a great way to save for your child’s education. Though the money in these accounts isn’t federally insured like a bank account, the investment income grows tax-free. Your beneficiary can use it to pay for tuition and other associated higher education costs.
What happens when you’ve meticulously put together such a means of saving for your child’s future only to find yourself trying to unwind your financial difficulties? Will you derail your child’s future if you file for bankruptcy?
Who Is the Owner of the 529 Plan?
When you file for bankruptcy, you must disclose all assets and liabilities in which you have an ownership interest. Though a beneficiary child or grandchild may be seen as having a beneficial interest in certain accounts opened by a parent or grandparent, that’s not the case for 529 Plans. For example, the money in a 529 Education Account isn’t considered the child’s property.
For bankruptcy purposes, the 529 Plan is owned entirely by the individual who opened the account and is named on it. If a person is the beneficiary of a 529 Education Account, they aren’t legally required to list the account on their bankruptcy schedules. Instead, the named parent or grandparent is the sole owner.
Who Is the Beneficiary of the 529 Plan?
To protect a 529 Plan in bankruptcy, the account beneficiary is essential. The bankruptcy law protects funds only if the beneficiary of the 529 Plan is your minor child, step-child, grandchild, or step-grandchild.
You can’t get any protection for funds in a plan you’ve set up for yourself or a spouse.
Are 529 Plans Protected During Bankruptcy?
There are two ways to protect the balance held in the 529 Plan: by excluding the balance from the bankruptcy estate or by exempting the balance. Excluded assets aren’t listed on the bankruptcy schedules, whereas exempted assets are listed but protected only up to specific dollar values.
Under section 541(b) of the Bankruptcy Code, funds in a 529 Plan are excluded from the bankruptcy estate and thereby protected from the court’s reach based on when the money was deposited into the account.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 excludes from the bankruptcy estate funds contributed to a 529 Plan more than 720 days before filing the bankruptcy petition. Contributions made between 365 and 720 days before the bankruptcy filing are limited to an exclusion amount of $5,000. Only amounts contributed within 365 days before the bankruptcy is filed are not excluded from the debtor’s bankruptcy estate.
Exempting the 529 Plan in Bankruptcy
If you can’t exclude the 529 Plan from the bankruptcy estate, you may be able to protect it in a Chapter 7 case by using an available exemption. In addition, depending on the value of your other assets, the 529 Plan may not be at risk even if the balance can’t be excluded entirely from the estate.
Without the ability to exclude or exempt the value of the 529 Plan, you may want to file a Chapter 13 case to protect the entire funds and enter into a repayment plan overseen by the court.
Proper Planning Maximizes Protection
Your 529 Plan may be safe if you file a Chapter 7 bankruptcy case. If not, Chapter 13 might serve your needs. However, it’s also possible that some planning is needed to protect your child’s college funds.
A qualified and experienced bankruptcy lawyer can help guide you to a solution that meets your needs and doesn’t jeopardize your situation.
ABOUT THE AUTHOR
Since I became a lawyer in 1995, I’ve represented people with problems involving student loans, consumer debts, mortgage foreclosures, collection abuse, and credit reports. Instead of gatekeeping my knowledge, I make as much of it available at no cost as possible on this site and my other social channels. I wrote every word on this site.
I’ve helped thousands of federal and private student loan borrowers lower their payments, negotiate settlements, get out of default and qualify for loan forgiveness programs. My practice includes defending student loan lawsuits filed by companies such as Navient and National Collegiate Student Loan Trust. In addition, I’ve represented thousands of individuals and families in Chapter 7 and Chapter 13 bankruptcy cases. I currently focus my law practice solely on student loan issues.
I played a central role in developing the Student Loan Law Workshop, where I helped to train over 350 lawyers on how to help people with student loan problems. I’ve spoken at events held by the National Association of Consumer Bankruptcy Attorneys, National Association of Consumer Advocates, and bar associations around the country. National news outlets regularly look to me for my insights on student loans and consumer debt issues.
I’m licensed to practice law in New York and California and advise federal student loan borrowers nationwide.