Individuals facing insurmountable debt turn to bankruptcy as a lifeline and a road to a fresh start. But the relief that comes with eliminating debt can have an impact on your children’s lives, and it’s important for you to be fully aware of all of the potential implications.
As is true with all bankruptcy filings, the extent of the effect on your day-to-day life will be determined by whether you file your bankruptcy under Chapter 7 or Chapter 13. While a Chapter 13 bankruptcy permits you to retain all of your property, under Chapter 13 your personal property is at risk, and that includes anything that belongs to your children unless they can show that a particular item was purchased with their own money. Still, there are exemptions available that generally make it unusual for the bankruptcy trustee to take household items or toys.
Beyond personal belongings, it is important to understand that any bank accounts that you hold in your minor child’s name but on which you are listed as the account holder must be included on the list of assets you will submit when you file your application for bankruptcy. These may also be exempted, but that will depend upon how much money is in each account. If the funds that are in your child’s name are UGMA or UTMA accounts, they will not be included on your list of assets, but that is only true for accounts that existed a substantial period of time before you apply for bankruptcy. Any transfer of funds into these accounts close to the time of a bankruptcy filing may be viewed as an attempt to shelter funds from the trustee.
Many parents open 529 accounts to save for their children’s education. Though these accounts are usually held in the parents’ name, funds that have been in the account for more than two years are fully shielded from the bankruptcy trustee, and up to $6,425 of money deposited between one and two years of the filing is also shielded. There is no protection for funds deposited within one year of a bankruptcy filing.
Beyond these specifics, your child is unlikely to be affected. If you pay child support you will still be obligated to make those payments, and if your child seeks financing for college your bankruptcy filing will not impact their eligibility for needs-based federal grants or loans, though if your bankruptcy occurs within five years of applying for credit-based financial aid, your credit history will likely have a negative impact on their ability to get a competitive loan.
For more information on how a bankruptcy filing will impact you and your family, contact our office today to set up a time for us to talk.
