How to Protect A 529 Plan In Bankruptcy

How to Protect A 529 Plan In Bankruptcy

By |August 10th, 2012|

Your child’s education is important, even when it comes to bankruptcy law.

Qualified state tuition programs, also called “529 plans,” are a great way to save for your child’s education.  Given the ever-spiraling costs of education, having such a plan in place is something your kids will thank you when it comes time to enroll.

Parents can opt for one of two types of a 529 Plan: a prepaid tuition plan that lets you pay tuition at a particular university, or; a tax-exempt savings account for a qualified beneficiary, generally a minor child or grandchild.

What happens when you’ve meticulously put together such a means of saving for your child’s future only to find yourself trying to unwind your own financial difficulties?  Will your planning be derailed by forces outside of your child’s control?

When it comes to bankruptcy, the fate of your 529 Plan is always a consideration.

Is Your 529 Plan Safe?

Under section 541(b) of the Bankruptcy Code, assets in a 529 Plan may or may not be protected from the reach of the court.  The answer depends on when the money was deposited into the account.

Funds in a 529 Plan are excluded from the bankruptcy estate if the money was deposited more than a year before the filing. This protection is limited to $5,000 for funds added to the 529 plan between one to two years before the case is filed.

For funds deposited more than two years before the case is filed, however, there is an unlimited protection.

It Depends On The Beneficiary

Under both circumstances, however, the beneficiary of the 529 plan must be your child, step-child, grandchild, or step-grandchild. You can’t get any protection for funds in a plan you’ve set up for yourself or a spouse.

If you’re the beneficiary then the account is considered to be yours for the purposes of filing a bankruptcy case.  The property needs to be exempted another way – either as a cash account or under a wildcard exemption – or you’ll be forced to surrender it in a Chapter 7 bankruptcy.

Plan And Protect

Depending on the situation, your 529 Plan may be safe in your case.  If not, there’s always the possibility that a Chapter 13 makes sense.  Or perhaps some planning is in order to minimize the loss when you file.

Either way, it’s one more reason for us to sit down and talk before you go off and make the mistake of either filing a case without a lawyer or making a move that may jeopardize your situation.

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.