Filing bankruptcy has significant ramifications, and one that often slips under a parent's radar is the effect bankruptcy will have on the 529 qualified tuition program they have been diligently contributing to for the last several years. As a parent myself, I want to do the best I can to ensure that my daughers receive the absolute best education possible, and with tuition costs outpacing inflation by an astronomical rate, there is no telling how much a four-year degree will cost our family. That's why we, and many other parents, have been contributing a portion of our income to a tax-advantaged college savings plan. Unlike your 401k retirement plan; however, a 529 savings plan is not offered the same protections under the bankruptcy code.
What is a 529 Plan? A "529" college savings plan is aptly named for the tax code section creating it. The benefit of a 529 plan is that deposits grow tax-free and any withdrawals spent on education related expenses such as tuition and books are tax-free as well. There are, of course, heavy penalties for withdrawing funds to pay off creditors or take an Alaskan cruise with the family.
529 Plans in Bankruptcy. 529 college savings plans are offered a certain level of protection under the bankruptcy code; however, unlike your retirement accounts, your kids' 529 accounts are not completely sheltered from your creditors. You see, under the bankruptcy code, all property of the debtor as of the filing of the petition date becomes property of the bankruptcy estate. This is a separate entity controlled by the trustee assigned to your case. The trustee's job is to seize and liquidate all your non-exempt assets for the benefit of your unsecured creditors. Under Georgia law, certain property, such as $10,000 of equity in your house, virtually all your retirement savings in a 401k or IRA, certain dollar amounts in household goods, etc., can be claimed as exempt from liquidation by the trustee. Non-exempt assets are the property left over after you have claimed all your exemptions under either federal or state law, depending on where you are filing bankruptcy. In addition to exempt assets, the trustee cannot liquidate assets that are not property of the estate, which includes certain funds contributed to a 529 savings plan. Here's the run-down of what every parent should know about 529 plans in bankruptcy:
As more food for thought, funds contributed to a 529 savings plan will only be protected if the beneficiary is your child, step-child, grandchild, or step-grandcihld. No saving grace if the funds were contributed for your brother, sister, niece, or nephew.
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