My kid’s in college on a 529 plan, will bankruptcy affect it? II
College education 529 plans and treatment during Chapter 7 bankruptcy were the topic of our recent post. This is the second part of the two-part post. The first discussed why a 529 plan is beneficial and the first “beneficiary” test used to determine if the funds can be excluded from the bankruptcy estate. In this post, we discuss the second major consideration.
Timing is the biggest factor in eligibility for exemption. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provided some relief for parents who have saved for their child’s education. This act created a two-year test. Those plans that were created at least two years prior to filing from bankrutpcy can be exempted.
Why the two-year test? The fear is that plans created within a two-year window could have been established to hide funds from creditors. In order to prevent accusations that the transfers were done with fraudulent intent, a debtor must disclose these funds to the bankruptcy trustee. Plans that were created within the two-year window are assumed to be part of the bankruptcy estate.
Even for those plans that are created within the two-year window, it does not mean that the funds will automatically go to creditors. There are other exemption options often available. Under federal law, there is something referred to as the “wildcard” exemption. This allows $1,125 to be protected even if the funds don’t qualify under the two-year test.
In some cases, a parent does not want to use the homestead exemption to protect the house. In this case, they may be able to use the $11,500 exemption for the college funds. There are even some state-specific exemption amounts that allow for 529 protections.
Whether a 529 plan will be excluded from a bankruptcy estate and to what extent can differ from case to case, which is just another reason that those considering filing for Chapter 7 protection should seek the assistance of an experienced bankruptcy attorney in Georgia.
Source: Opposing Views, “College 529 Plan & Bankruptcy,” Beverly Bird, May 7, 2013