Will My Bankruptcy Affect My Children? Skip to main content

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Will My Bankruptcy Affect My Children?


My parents filed bankruptcy when I was about fourteen. I remember being worried and a little frightened by the word "bankruptcy" and the unknowns surrounding the concept. But I also knew that it was not something my parents were entering into lightly and that every other option had been considered. It was the first time I really took notice of financial issues concerning our family.

They had bought a small business that seemed to be a melding of their passions and the promise of some freedom from the 'rat race' and anonymity of employee-hood. While they had a passion for the business, they were not very business savvy, and ended up being taken advantage of by many people they thought were loyal to them.

I wish I could say that my parents' bankruptcy had no discernible impact on me, a shy, awkward teenager, and my siblings, but that isn't true. There were big changes in our lives. In most cases, a bankruptcy filing will allow a family to continue living in their home by staving off foreclosure proceedings. But since the house my family lived in was located on land owned by the business, we ended up moving. We changed schools and made new friends. My parents went back to being employees.

Now, before you conclude that this is a sad story and that your kids would be emotionally or socially scarred for life if you filed bankruptcy, I should tell you about all the positive things that came of my parents' bankruptcy. First, we moved to a nice neighborhood where I met two of my best friends. Before moving, our home had been very isolated and we spend a lot of time alone while our parents worked their business. Afterward, our home was filled with kids from the neighborhood.

Second, while my parents did return to being employees, they found better jobs than before and worked regular hours. When you run a small business, the lines between working and not working are blurred. The business becomes a 24 hour occupation. Third, the constant stress and anxiety that my parents were subjected to from trying to keep a sinking business afloat was gone. The fear, anger, and feelings of despair finally left our home and we were finally able to function like a normal family again.

Aside from the positive benefits bankruptcy affords by removing the financial strain that may be adversely impacting your family, here are a few more things to consider when you are thinking about bankruptcy and kids:

Bank Accounts: If you've opened a bank account for your children's birthday money, gift money from relatives, or money they've earned, it's important to make sure this account is set up correctly. If the account is just under your name or if you've drawn money out to pay your own bills, this account could be jeopardized by your bankruptcy filing. Of course, any 529 college savings plans are completely protected under North Carolina exemption laws, and the funds contained in those accounts will not affected by a bankruptcy.

Opening accounts under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can help protect these assets. The idea behind these two methods is that the "giver" remains custodian of these accounts until the minor reaches majority. Once the money is transferred into these custodial accounts, it can't be taken back. The child is the true owner of the asset, and therefore the money does not come into the bankruptcy estate.

Child Support Payments. Debts resulting from child support will not be discharged by bankruptcy if you or an ex-spouse files for bankruptcy. In a Chapter 7 bankruptcy filing, child support obligations become top priority when assets are being liquidated. In a Chapter 13 bankruptcy filing, child support payments will be structured within the agreed repayment plan.

This bankruptcy protection for children applies whether or not a debtor is behind on support payments. The good news is that ex-spouses may find it easier to fulfill their child support obligations once the bankruptcy alleviates a majority of their other debt burdens.

If you've been wondering about whether your child's future could be jeopardized by bankruptcy, a bankruptcy lawyer can examine all the details and clear any confusion. Remember, your family's future is dependent on your financial viability. If you are buried beneath a burden of debt, protect your family by filing for bankruptcy.

The attorneys at the Law Offices of John T. Orcutt have helped thousands of families seek debt relief. In North Carolina, call +1-919-646-2654 to schedule a free initial debt consultation today.

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