Are your children’s education saving funds exempt when you file bankruptcy? (Lancaster attorney David Lozano is here to put your mind at ease!)
Couples and single parents frequently take advantage of my offer for a free consultation to discuss their options for dealing with debt. For many their concerns involve not only them, but their children as well! Parents worry whether the savings they’ve set aside for their children’s future education will be affected when they file bankruptcy.
I am pleased to say that you can protect your children’s education funds by using special savings plans, such as a 529 or Coverdell Education Savings Account (ESA). Wikipedia compares and contrasts the two plans well:
Important differences with 529 plans
- Coverdell ESAs have lower maximum contribution limits; currently $2,000 can be contributed per year per child, while 529 plans generally have no restrictions on contributions, up to the maximum lifetime contribution.
- Coverdell ESAs can allow almost any investment inside including stocks, bonds, and mutual funds, while 529 plans only allow a choice among a number of state run allocation programs. The rules for investments allowed in ESAs are the same as those for IRAs.
- Balances in a Coverdell ESA must be disbursed on qualified education expenses by the time the beneficiary is 30 years old or given to another family member below the age of 30 in order to avoid taxes and penalties; there is no age limit for 529 plans.
- Coverdell ESAs allow withdrawing the money tax free for qualified elementary and secondary school expenses; 529 plans do not.
- The income level of a donor may affect contributions into a Coverdell ESA, but would not affect contributions to a Section 529 plan.
Important similarities to 529 plans
- Money in both a Coverdell ESA and a 529 plan is not considered the child’s (beneficiary’s) money when applying for federal financial aid as long as the owner of the account is someone other than the beneficiary, such as a parent. This works to increase the child’s potential financial aid because parents are expected to contribute only around 6% of their assets to finance college education, as opposed to the child’s 35%.
- The custodian of both an ESA and a 529 plan can designate a new beneficiary without incurring taxes or penalties provided that the new beneficiary is an eligible family member of the previous beneficiary.
When filing bankruptcy, money that has been in a 529 or ESA savings account for over two years is exempt from the bankruptcy process! And up to $5,000 worth of money in the account that has accumulated for at least a year but under two years is also exempt. In addition, only money that has been added to the savings account within a year prior to bankruptcy is available to creditors–everything else is protected!
The future depends on the well-being of the next generation, and a large part of that well-being involves the extent of their intellectual growth! Visit our Lancaster location for a free consultation. Protecting the education funds of our children helps to ensure their continued intellectual growth!
A common question I get from my clients is if filing bankruptcy will have any effect on their student loans. Unfortunately, filing bankruptcy does not eliminate or reduce your student loans. The U.S. Bankruptcy Code states that only “undue hardship” is grounds for discharging student loans. Now before you start planning your appeal saying that you are facing “undue hardship”, I should tell you that the Code’s definition will settle for nothing less than permanent and total disability.
While filing bankruptcy does not discharge your student loans or prevent interest from accruing on the loans, there is a ray of hope. Filing bankruptcy will give you a little extra time–up to five years–to get your finances straightened out and possibly catch up to the point where you are able to pay off your student loans! You can do a lot of things in five years if you set your mind to it!
Pursuing the career you took those student loans for may be the key to paying off your loans as well! Don’t let student loans interfere with your goals in life! Contact me for a free consultation. It’s never too soon or too late to seek professional advice on settling your debt!