Detroit Bankruptcy Lawyer: Can I Protect My Child’s College Savings Plan in Bankruptcy?

Saving for college is tough, especially if you don’t want to burden your child’s future with student loans. Most parents are looking to the Michigan Education Savings Plan (MESP) (also know as a Section 529 Qualified Plan) to help their children get a college education. While I can’t advise on the particulars of the MESP plan, I can say that if you have one, they could have an effect on your bankruptcy filing. How will it have an effect? Well, it depends. Whether you are filing a Chapter 7 or a Chapter 13, the law is kind of strange in this area of Section 529 plans. First off, the plans actually belong to the the person who set the account up, not necessarily to your child. Because the account may belong to the parents who are filing bankruptcy, it becomes part of the bankruptcy estate, and must be included as an asset for bankruptcy purposes. However, with the 2005 changes in the bankruptcy laws, Congress saw the need to encourage savings for college and carved out an exception. The law allows for older contributions to be excluded from the bankruptcy estate, while newer contributions are not. The rule is this: If contributions were made more than two years before filing for bankruptcy, those contributions are excluded from the bankruptcy estate. That means they are fully protected from the reach of bankruptcy trustee. For contributions made more than a year-but less than two years before the filing of your bankruptcy petition, the first $5,000.00 are excluded from the bankruptcy estate. Finally, those contributions made less than a year before filing your bankruptcy petition will be included in the bankruptcy estate. This does not necessarily mean you will have to surrender your Section 529 plan to the trustee if part of it is included in the bankruptcy estate. If part of the Section 529 plan is included in the bankruptcy estate, you may be able to use some of your Federal exemptions allowed to you by law to exempt the portion that comes into the bankruptcy estate. How much you can use all depends on the exemption planning your attorney uses. Remember, you can’t just start up a Section 529 Plan, then transfer a lot of cash to fund it in order to avoid losing that cash in a bankruptcy filing. You will lose at that game. Careful planning must be made between you and your bankruptcy attorney, and timing to filing may be key. So you can see why it is important to hire a qualified bankruptcy attorney to handle you case. If you have a situation that was or was not covered here, call your Detroit Bankruptcy Lawyer at (586) 439-4297, Extension 0, and set up your free consultation and talk to me about your situation. As always, if bankruptcy is not an option for you and/or your spouse, I will be the first to tell you.

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