The decision to file for bankruptcy is a momentous one. If you are considering seeking relief through bankruptcy, you have likely been experiencing stress for some time now. Constant hounding from creditors can sour even the most optimistic among us, and if it can do that to us, you might find yourself wondering if it’s impacting your kids as well. Whether your children are in elementary school, high school, or even in college, family financial hardships can sometimes have a negative impact on kids.
But the good news is that, in most cases, kids do not suffer too much – if at all. As long as you are careful to not discuss financial issues when your kids are present, the actual filing of bankruptcy shouldn’t take much of a toll on the little ones in your family. But there are a few issues that it is best to be aware of when it comes to your kids and bankruptcy.
Your Child’s Assets
If you are filing for Chapter 13 bankruptcy, both your and your children’s assets are exempt since Chapter 13 is basically a restructuring of your debt under a new payment plan. However, under Chapter 7 bankruptcy, assets can be sold in order to pay your debts. Your children don’t typically have assets of their own that your bankruptcy trustee would be interested in selling, but they might. And if they do have substantial assets, it is important to be aware of what is exempted from your bankruptcy and what is not.
For instance, if you bought a car for your child, you will need to know if that will be sold off to pay debts or if it is protected from your bankruptcy filing. In this situation, the question of legal title and equitable title to the car will come into play as well as the possible use of exemptions that may save the car from the bankruptcy trustee’s hands. As you can see, this is a complex issue that truly requires the advice and guidance of a seasoned bankruptcy attorney. Your lawyer will be able to look at the details of your particular situation and determine whether or not assets like these can be retained by your kids.
Another big exception to the exemption of your children’s assets is your children’s bank accounts. If you set up a savings account or something of that nature in your child’s name, the bankruptcy trustee could consider that as part of your assets. The only way to be sure to avoid having your children’s monetary accounts considered as one of your assets is to set up that account under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). Of course, if the child is a dependent and a working minor and has set up an account in their own name and can prove that all deposits are from their own work and not a transfer of funds from you, then it would be considered exempt. Again, the advice and guidance of your attorney can clarify any questions that may arise concerning your children’s bank accounts.
Child Support
No parent wants to default on their child support obligations, but when money is tight, writing that check can become next to impossible. So if you find yourself in arrears with these vital payments, you may be wondering if declaring bankruptcy will help the situation in any way.
However, the judicial system takes child support obligations very seriously – whether you are in family court or bankruptcy court. These payments are for the benefit of the child and are in no way intended to reward or punish parents. So if you get behind, bankruptcy is not likely to discharge these payments because the child is due the amount owed.
The bankruptcy court will make repayment of child support a major priority. In fact, in a Chapter 7 bankruptcy, child support payments are one of the first things that are paid off from liquidated assets (even before other creditors). In a Chapter 13 bankruptcy, child support arrears are paid first and your child support payments will be included in your repayment plan.
Education and College Fund Contributions
If you have been contributing to a child’s college education fund, continued contributions could be considered a luxury expense by the bankruptcy court. However, you should keep in mind that an account like this can impact your child’s application for financial aid. While it won’t likely affect your child’s ability to get needs-based tuition aid like Pell Grants and Stafford loans, it is considered an asset for your child and could decrease their ability to get federal financial aid for college.
One way of protecting educational contributions would be by setting up a 529 education fund. This fund is established by section 529 of the Internal Revenue Code and not only offers significant tax advantages, but it also protects those funds from creditors and the bankruptcy trustee. However, there are limits to what is protected. Any fund deposited within a year before filing for bankruptcy can be liquidated. Deposits made between one and two years prior to bankruptcy are exempt up to $6,225 per beneficiary, and anything after two years is exempt.
Private Lenders
If you are funding your child’s education through a private lender, then there may be consequences to filing for bankruptcy. Under Chapter 7 bankruptcy, the lender has the option of discontinuing the funding payments unless you work out a special arrangement with that lender. For a Chapter 13 bankruptcy, the courts try to get your payment back in line with your income in order to effectively execute a repayment plan for your debtors.
Also, note that private school tuition may not be allowed in a Chapter 13 bankruptcy. However, Chapter 7 bankruptcy does not affect your ability to pay for private school tuition.