Filing Bankruptcy May Put Your Child's College Savings at Risk

A few months ago, a ruling by an Idaho bankruptcy judge said that parents with a college savings plan for their children could lose the college savings to creditors when they file for bankruptcy.

The Idaho case involved parents who had put money in to a 529 college savings account for their daughter. When the parents filed bankruptcy shortly after opening the account, the judge ruled that the account is considered part of their assets and can therefore be used to repay creditors. The judge ruled this because the parents had legal control over the funds they could theoretically use the money for reasons other than for their daughter to attend college if they so wanted to.

This ruling is important for bankruptcy filers because if they want to put money in a 529 savings account for their children, they will need to consider some safety measures to take first. Because money put into the account at least 720 days before you file for bankruptcy will most likely be protected, it is a good idea to invest early. The reason this condition is in place is so that filers don’t take advantage of the system by trying to save their assets by opening 529 accounts right before they file.

Another possible precaution to take if you are thinking of filing for bankruptcy is to keep the account in another person’s name – your child, for example. If they are also interested in adding education funds and are financially stable it can protect the account from creditors because the account is not legally yours.

The Idaho ruling does not mean that every bankruptcy judge will follow the same decision, but it brings up some issues about how bankruptcy can affect your children and lets filers know that it’s important to take safety measures to protect your children’s’ college savings funds. Contact a bankruptcy attorney to ensure that the money in your 529 account or any other college fund will be safe if you file bankruptcy.