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Bankruptcy and College Savings

With the ever-spiraling cost of higher education today, saving money for your child’s college education is a difficult and sometimes impossible task.  However, you scrimped and saved meticulously planning so your child would not be burdened with student loans for years to come.  The 529 State Tuition Plan was a perfect way for you put aside money each year. Unfortunately, despite all your planning, you find that you are having financial difficulties of your own.  What now? What happens to that 529 Plan if you file for bankruptcy?

 

Is your 529 Plan Safe?

One of the assets that enjoy some protection during bankruptcy are college savings funds such as 529 plans and Educational IRAs. Under section 541(b) of the Bankruptcy Code, assets in a 529 Plan may or may not be protected from the reach of the court.  The answer depends on when the money was deposited into the account. Thus the trustee will take into account when the contributions were made by the debtor.

 

  • If college savings contributions were made prior to 720 days before a bankruptcy filing; then they are fully protected from seizure by creditors.
  • Contributions to a college savings fund that were made 365 days to 720 days before the bankruptcy case was filed enjoy partial protection. This protection is limited to $5,000 for funds added to the 529 plan between one to two years before the case is filed.
  • If a debtor makes contributions to a college savings fund less than one year before they file bankruptcy, that money is not protected from seizure.

 

Who is the Beneficiary?

Most people set up these college funds for their children, grandchildren, or stepchildren/grandchildren.  These protections apply in the case of these beneficiaries. However, in a case where you have been saving for yourself or your spouse there is no protection. A qualified bankruptcy attorney will need to look at other ways to exempt the money in your situation.  Regardless of the amounts and timeline for your bankruptcy, always consult an experienced bankruptcy attorney to review your case prior to filing with the courts.