My kid’s in college on a 529 plan, will bankruptcy affect it?
Giving their children the best opportunities in life is something that parents strive to do in Atlanta, Georgia. This often includes saving for college, and savvy parents often do this through a 529 plan that maximizes the money under certain tax advantages. This type of plan allows the funds to be treated as “completed gifts” by the Internal Revenue Service.
Even those savvy parents that plan ahead for their own retirement and their child’s education get hit with, well life. A sudden accident, medical diagnosis, unemployment, economic changes and much more can cause financial hardship. Chapter 7 bankruptcy is a viable solution, but some parents wonder what will happen to these educational funds. Could they lose them to satisfy creditor claims?
Technically, these funds are considered a part of a bankruptcy estate, which means that it is included in the total available assets that could be used to pay off creditor claims. Before paniking, remember that the Bankruptcy Code provides for certain exemptions such as a homestead or a car. These funds can be considered an exemption, but they have to pass a couple tests first.
The first is a beneficiary test. If the plan was set up to benefit a child or grandchild, it may be eligible for exemption. If it was created for anyone else, including a farther removed family member such as niece, it will likely not be eligible for any exemption.
This is not the only test for a 529 college education plan. Our next post will discuss the further considerations and options parents may have for keeping these funds out of their bankrutpcy estate.
Source: Opposing Views, “College 529 Plan & Bankruptcy,” Beverly Bird, May 7, 2013