• How Will Filing for Bankruptcy Affect Your Children?
  • February 5, 2019
  • Law Firm: Leech Tishman Fuscaldo & Lampl, LLC - Office
  • Most people who file bankruptcy are seeking a fresh start for themselves and their family, including a brighter future for their children. Therefore, we are often asked by clients how bankruptcy will affect their children now and in the future. Below are answers to some of the most frequently asked questions we receive on this topic.

    1. Will my children lose their personal property due to my bankruptcy filing?

    Generally, everything in your home is considered your property even if you gave those items to your child. Therefore, all assets, including your child’s toys, books, electronics, and furniture should be listed as your property in your bankruptcy schedules. If your child has purchased certain items with his or her own money and has the receipts to prove it, you are not required to list that property as an asset. For instance, if your child has a part-time job and purchased his own computer and kept the receipt, the computer would not be included as your property.

    In a chapter 13 bankruptcy, you will keep all your property. In a chapter 7 bankruptcy, the chapter 7 trustee can take any property not covered by exemptions and sell it to pay creditors, which would theoretically include your child’s property. However, the federal bankruptcy exemptions are quite generous, so in most cases your child’s property will be exempt. Even if your child’s property is not exempt, trustees are not generally inclined to liquidate used furniture, toys, or other household items, unless those items are extremely valuable.

    2. What happens to my child’s bank account if I file bankruptcy?

    If you open a standard checking or savings account in your minor child’s name, you will likely be listed as the account holder. Therefore, money deposited into such accounts are your property and should be listed as your asset on the bankruptcy schedules. Many debtors can exempt these funds, but it depends on your specific circumstances, including the amount of the funds at issue and your available exemptions.

    Funds held in trust for your children are not property of the bankruptcy estate. For example, money held in accounts created under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act are not property of the bankruptcy estate and, therefore, not available to the chapter 7 trustee even if you are the custodian of that account. This is because transfers into these types of trust accounts are irrevocable. Please keep in mind that if you made the transfers into such an account prior to filing a chapter 7 or chapter 13 bankruptcy, those transfers could be avoided as fraudulent transfers. Generally, a parent’s bankruptcy will have no impact on trust accounts.

    3. What happens to my child’s 529 account if I file bankruptcy?

    A 529 account is a college savings plan that offers tax advantages and protection from creditors. A 529 account usually belongs to the parents, and if the parents file bankruptcy, it is considered an asset that must be listed on their bankruptcy schedules. If the beneficiary of the 529 account is your child or grandchild, funds placed into the 529 account more than two years before the bankruptcy filing are fully protected. Funds placed into the 529 account between one and two years prior to the bankruptcy filing are protected up to $6,425 per beneficiary. Funds placed into a 529 account within one year of bankruptcy are not protected at all unless you are entitled to use an exemption.

    4. What happens to child support payments in a bankruptcy?

    A bankruptcy will not alter a child support obligation. Child support arrears are not dischargeable in bankruptcy. To the contrary, child support arrears are priority debts and are generally paid first in a chapter 7 or chapter 13 bankruptcy.

    If you are in a chapter 13 bankruptcy, you must remain current on your child support payments or you may not be able to confirm your plan or obtain a discharge.

    5. Will my child be able to obtain college loans if I file bankruptcy?

    Your bankruptcy will not alter your child’s ability to obtain need-based financial aid such as Pell Grants and Stafford Loans. Unfortunately, a bankruptcy may limit your ability to help your child pay for college. For instance, a bankruptcy will generally disqualify you from obtaining any credit based financial aid, such as a PLUS Loan or Graduate PLUS Loan, for five years. Depending on your credit history and score, you may not qualify for such a loan even if you do not file bankruptcy. If you are denied a PLUS loan, your child will usually qualify to take out a larger loan on their own behalf due to that denial.

    At Leech Tishman, we understand filing for bankruptcy is a difficult decision with many factors to consider. We have assisted many parents through the Chapter 7 and Chapter 13 bankruptcy process. In most cases, filing for bankruptcy secures a fresh start for a better future for you and your children. We are happy to answer any questions regarding how bankruptcy may affect your children during a free consultation. Please give us a call at 412-261-1600.