If you’re dealing with debt and considering bankruptcy, you may worry about what will happen to the money you’ve saved for your child’s education. Fortunately, 529 college savings plans usually receive special protections during bankruptcy cases. This article will examine the impact of bankruptcy on 529 plans and the protections available for them.
What Is a 529 College Savings Plan?
A 529 education savings plan offers a method to save for school-related costs. Families can deposit money into this plan to cover expenses like college tuition or K-12 education. The earnings grow without being taxed, and you can withdraw funds tax-free for qualified educational expenses.
How Bankruptcy Affects Your 529 Plan
When you declare bankruptcy, the court includes your assets in the “bankruptcy estate” to settle your debts.Fortunately, bankruptcy law grants 529 plans special protections. However, the extent of these protections varies depending on the account’s owner and beneficiary,as well asthe timing of contributions.
For bankruptcy purposes, the person who opened the account is considered the owner, which means they must list the 529 plan as an asset when filing for bankruptcy.
However, their 529 plan might qualify for protection, as long as the beneficiary is the owner’s child, stepchild, grandchild, or step-grandchild.
If the 529 plan beneficiary is your child, stepchild, grandchild, or step-grandchild, then:
- Funds contributed over 720 days (about 2 years) before filing for bankruptcy are completely excluded from the bankruptcy estate.
- Contributions made between 365 and 720 days before filing receive protection up to $5,000.
- Funds contributed within 365 days (1 year) before filing are not protected. Though you may use any remaining wildcard exemption to protect.
529 Plan and Chapter 7 vs. Chapter 13 Bankruptcy
The type of bankruptcy you file can affect your 529 plan. In Chapter 7 bankruptcy, the bankruptcy court may liquidate unprotected portions of your 529 plan to pay creditors.In Chapter 13 bankruptcy, you might be able to protect more of your 529 plan by including the value in your repayment plan.
We Can Help Understand Your Options
At Brock and Stout, we know that protecting your child’s future takes priority, even during financial challenges. We can guide you through the complex areas of bankruptcy law and college savings to keep your children’s educational funds as safe as possible.
If you’re considering bankruptcy and have questions about your 529 plan or other assets, contact our office today. Let our family help your family secure a brighter future, even during challenging financial times.