If you’ve been socking away money for your child’s college education since he was wearing diapers, it is understandable that you would not want any subsequent financial stress you may have to cause that money to be lost in a bankruptcy proceeding.
The good news is that it is possible that your 529 plan may be protected from bankruptcy. The provisions of a 529 plan allow parents to dedicate funds for a child’s educational expenses and also benefit from some tax breaks. While the child remains the account beneficiary, parents retain ownership and control of the account.
According to the Internal Revenue Service (IRS), your plan contributions constitute “completed gifts” to your child. But since they are still a part of your entire estate, if you file for Chapter 7 bankruptcy, the funds could potentially be liquidated and used to pay off creditors.
Filing for a Chapter 13 bankruptcy doesn’t require you to liquidate all your assets. Still, a 529 plan could be affected in some situations. Since Chapter 13 creditors do receive repayment, to exempt a 529 plan, they must receive as much as they would if a debtor filed under Chapter 7.
Bankruptcy proceedings are very technical matters that have a lot riding on their outcome. When your family’s fortunes and your child’s educational fund are in jeopardy. the sensible decision is to seek legal guidance and advice to determine the best course of action to follow.
An attorney can review your case and offer a recommendation that is likely to bring about the best resolution possible for your situation.