Will Filing Bankruptcy Put College Savings Accounts for Your Kids at Risk? Skip to main content

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Will Filing Bankruptcy Put College Savings Accounts for Your Kids at Risk?


College savings

Find out about savings in bankruptcy

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Those who have dutifully saved up money for their kids’ college education may be worried that filing bankrupcty will put these savings at risk. In some cases, that might happen. It depends on how you have saved up for college and what type of North Carolina bankruptcy you file. This can be a complicated issue, and the best route is to consult a bankruptcy attorney about your debt circumstances to get the information you need to make an informed decision.

Which College Savings Accounts are Sheltered in Bankruptcy?

It’s easier to start with which accounts are not protected. If you have saved money for your child’s college education in a checking or savings account, other bank account, or a broker account, it may not be able to be protected in bankruptcy. If not sheltered, these will be considered part of your assets that might be accessible to satisfy your debts.

Funds kept in state-run 529 plans can be protected in bankruptcy. 529 plans have been around since the 1990s and can be very advantageous because they allow consumers to set aside money on a pre-tax basis. This means these funds are not counted in your taxable income. What’s more, so long as the money is used for educational expenses, it is not taxed on withdrawal either.

Bankruptcy Laws Protect 529 College Savings Plans

Under U.S. bankruptcy law, in most cases, 529 funds can be protected. There are exceptions, though, as happened back in 2009. In one bankruptcy case, a couple opened up a 529 savings account, put a lump sum of $50k in it, and then filed for Chapter 7 bankruptcy. Because the court found that their action intended to shield the money from bankruptcy, it was not protected.

A good rule of thumb is that money added into the 529 plan in the year prior to bankruptcy is not shielded and by day 365 to 720 prior to the bankruptcy, only $5580 may be shielded from creditors in the bankruptcy process. However, if you have been dutifully setting money aside all along, then most or all of it should be sheltered. Only those seeking to play the bankruptcy system will not be protected.

Bankruptcy Law Also Protects 401(k) and Retirement Accounts

In addition to college 529 plans being sheltered in bankruptcy, retirement accounts such as IRA, 401(k), and pension accounts are also usually protected from creditors and the trustee in bankruptcy. However, as with 529 accounts, if you use a retirement account to try and game the system, you could end up in trouble.

For instance, if you deposit a lump sum into a 401(k), IRA, or another type of retirement account and then file for bankruptcy, the trustee assigned to your case can request those amounts be made accessible to your creditors because you were going out of your way to shield it. Bankruptcy law offers plenty of opportunities to protect your assets and deal with debt without cheating the system.

Find Out More About Protecting Your Assets in Bankruptcy

Chapter 7 and Chapter 13 bankruptcy can be a great route to significant debt relief, but assets are also a concern. Before you decide that one route is better than another or that you can’t get debt relief through filing bankruptcy, consult a reputable and experienced North Carolina bankruptcy attorney. They will look at your debt, income, and assets in order to tell you whether bankruptcy can help your finances.

Even if you decide not to file bankruptcy, there is no harm in going in for a free consultation to discuss your options and find out whether bankruptcy is a fit for you. Contact the Law Offices of John T. Orcutt today for a free North Carolina bankruptcy consultation. Call +1-919-646-2654 now for a free appointment at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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