When filing for bankruptcy, it's natural to worry about how the process will affect your child. Whether your son or daughter has inherited a fortune or just has a little money in the bank that they've saved from birthday cards and tooth fairy money, their wealth belongs to them and you absolutely do not want to interfere with that. If you're filing for bankruptcy, read on to learn which of your child's finances could be affected, and what you can do to protect them.
What Won't Be Affected
Child Support -Those who don't have custody of their child may be concerned that, by filing for bankruptcy, their child support will be discharged as debt and they won't be able to contribute to the future financial well-being of their child.
There's no need to worry here. Child support is not dischargeable under Chapter 7 or Chapter 13 bankruptcy. In fact, under Chapter 7 bankruptcy, child support is the first thing to be paid off after the liquidation of the filer's assets. Under Chapter 13 bankruptcy, child support payments are worked into the filer's structured repayment plan, including any past-due amounts. So, even if you owe thousands of dollars in child support, you'll actually have the opportunity to completely catch up, and stay current after filing.
Student Loans - Your filing for bankruptcy will not affect your child's ability to secure any need-based federal financial aid. You will not qualify for credit based loans to help your child, such as a PLUS loan, or Parental Loan for Undergraduate Students, but as a result of being denied for a PLUS loan, your child will be eligible for a larger unsubsidized Stafford loan.
What Could Be Affected
Savings And Checking Accounts - In order to protect any bank accounts your child might have from repercussions resulting from your filing bankruptcy, you'll need to set them up correctly. Never place only your name on your child's account. By doing so, it is considered that the account belongs to you and you'll need to list any funds within it as your personal assets when filing for bankruptcy.
Instead, ask your banker to set up a custodial account that is protected by the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA). These types of accounts cannot be touched by anybody except your child.
Keep in mind that custodial accounts should be established well in advance of filing for bankruptcy, preferably while your bank account is in the red. Any custodial accounts set up after the start of your financial problems will create suspicion and probable cause for your trustee to try to collect the funds.
Education Funds - Do you have money set aside for your child for their college education? You've got 2 options to protect these funds. You can either place the money in an UGMA or UTMA account, as mentioned above, or you can place them in a 529 education fund.
For one year, any deposits you make into a 529 education fund will be fair game for your bankruptcy trustee. The following year, though, any deposits made in the first year are exempt, up to $6225. Any deposit that is at least 720 days old is completely exempt from collections, regardless of the amount.
529 educational funds offer a relatively safe way to build your child's educational fund up gradually, and to each year have a larger amount that is wholly protected from your bankruptcy trustee or creditors.
If you're worried about how your filing for bankruptcy will affect your child's financial future, you can relax a little bit. If you're paying child support, those payments will remain intact, and you child will by no means be prohibited from qualifying for student financial aid. Furthermore, any assets that could be considered for collections by your trustee can easily be protected with a little forward thinking and the right type of banking account. For more information, you can contact a local bankruptcy lawyer, such as John G Rhyne Attorney At Law.
