One of the main reasons why New York parents hesitate to file for bankruptcy is concern over how the decision will affect their children. Even when their credit card bills are months in arrears and the bank is on the verge of foreclosing on the family home, they worry that their children’s property or 529 educational savings accounts will be seized.
Many of these worries have no basis in fact, and even the ones that are a possibility can usually be handled without your children being negatively affected.
Property belonging to your child
When you file for Chapter 7 bankruptcy, your trustee can take any household property not covered by an exemption and sell it. Theoretically, this includes everything you bought for the children. In reality, bankruptcy trustees aren’t inclined to confiscate used clothing, toys, and bedroom furniture unless their resale value is high, so even if they aren’t exempt, then the chances of losing them are slim.
The child’s bank accounts
Money that legally belongs to your child, such the contents of a bank account created under the Uniform Gifts to Minors Act, is not included in your bankruptcy estate, so it cannot be taken by creditors or a bankruptcy trustee. It is important to remember, however, that if you transfer money into a child’s account before filing for Chapter 7 or 13, then the transaction will come under scrutiny and may even be undone if the trustee believes you are trying to keep assets from creditors.
529 educational funds
The U.S. bankruptcy law excludes the money in 529 educational funds from your bankruptcy estate, under the following conditions:
- The money must be for the benefit of your child or grandchild (includes stepchildren and step-grandchildren).
- No deposits must have been made within the 365 days prior to your filing, as this money can be seized. Funds transferred between 365 days and 720 days prior to filing are limited to a maximum of $5,000. Any deposits made over 720 days ago are 100% exempt.
Tuition for private school
Parents who want to send (or already send) their child to private school worry that bankruptcy will make that legally impossible. If you file Chapter 7, then there are no restrictions that prevent you from providing your children with a private school education. Chapter 13 is different: the means test allows you to spend a maximum of $1,875 per year for a child’s education costs, so if tuition is higher, then you may have to investigate other options.
Loans for college
Filing for bankruptcy will not prevent your child from obtaining financial assistance for college. There may be some limitations, as you will not be eligible for credit-based funds for five years after filing, but your child may still qualify for need-based financing such as Stafford Loans and Pell Grants.
It’s normal to worry about how your child’s future will be impacted by your decision for filing for bankruptcy. Jayson Lutzky is a Bronx, NY personal bankruptcy attorney. He offers free in-office initial consultations. If you have questions or concerns, then be sure to present them to Mr. Lutzky at your consultation. Call 718-329-9500 to set up your appointment. Convenient Saturday hours are available.