Does Filing for Bankruptcy Affect Your Children?
Bankruptcy has repercussions that all debtors must fully consider before they decide to file. We’ve written before about some of the considerations, especially how a bankruptcy will affect your chances of obtaining a new job or securing an apartment.
Debtors also should consider how bankruptcy will affect their children. Of course, your ability to find a job or apartment quite directly impacts your kids. But there are other ways that your children could be affected, which our Plantation bankruptcy lawyer reviews below.
Your Child Can Lose Property in a Chapter 7
In a straight Chapter 7 liquidation, debtors can lose non-exempt property. This also includes your children’s property, such as their bedroom furniture and toys. An exception exists if your child bought something with his or her money. However, gifts you give your children will still be considered the property of the parents.
Of course, trustees have discretion about whether they sell items, and you probably will keep household furnishing. No trustee wants your child to be without a bed, after all. However, your child might have an expensive toy, such as an ATV or go cart. If it has sufficient value, the trustee could sell it.
Your Child’s Bank Accounts Might Be Protected
This is a complicated area. For example, the bankruptcy code protects money held in accounts created under the Uniform Transfers to Minors Act or the Uniform Gift to Minors Act. This money is protected because parents might manage the money, but they can’t withdraw it for their own purposes. If you just set up a bank account in your child’s name, however, then things could be different.
Also be careful about transferring money to a trust account right before filing. The trustee might consider that a fraudulent transfer and claw it back.
A 529 Educational Fund for a Child is Protected–Usually
These are tax-advantaged accounts created pursuant to section 529 of the Internal Revenue Code. They are a great benefit to have because parents or others can contribute to the fund on a pre-tax basis. Funds are invested much as they would be in a retirement account and can grow substantially over time. The beneficiary gets to make tax-free withdrawals for certain educational expenses.
Fortunately, these accounts are generally exempted from the bankruptcy estate, so a creditor cannot reach them. The trustee also cannot raid the fund for the benefit of your creditors.
There are limits to this broad protection, however:
- The beneficiary on the account must be a child or grandchild, including step-children and step-grandchildren. If not, you cannot protect the account.
- You cannot protect any deposit made within a year of filing for bankruptcy. If made between 365 and 730 days, you can exempt only a certain amount. Only deposits made after two years are fully exempt.
Your Child Can Still Get College Loans
A parent’s bankruptcy does not prevent a child from getting Pell Grants and Stafford Loans. But parents will be prohibited from getting Parental Loans for Undergraduate Students (PLUS Loans) and Graduate PLUS Loans within 5 years of filing. There are some exceptions, so talk with a lawyer if you have children entering college and you hope to borrow for them.
Make an Informed Decision
No one should rush into Chapter 7 bankruptcy. Instead, carefully review your options with a Plantation bankruptcy lawyer at Nowack & Olson today. Call 888-813-4737 to schedule a free consultation.