May 30th, 2010 by Reed Allmand 
Understandably, debtors considering bankruptcy want to make sure they protect their assets especially those that are earmarked to go to their children. But one of the common misconceptions of debtors considering bankrutpcy is that they can simply transfer some money into their kid’s bank account or a 529 plan and that will protect that cash from creditors during bankrutpcy. That’s completely false, here’s what you need to know:
While a 529 plan designed to fund your child’s college education can be protected during bankrutpcy, there are strict rules that apply.
- If you run out on the eve of your bankruptcy filing and open up a 529 plan to fund your kids’ college education, the bankruptcy trustee will consider that an illegal transfer of assets and demand that you hand over the money to the bankruptcy court.
- If a debtor has already been funding a 529 plan over the course of one year or more but files bankruptcy less than 2 years later, they money in the plan is only partially protected from creditors. The bankruptcy court cannot seize the first $5,000 deposited into the 529 plan but the rest becomes the property of the bankruptcy estate.
- Any money deposited into a 529 plan plan 2 years or more before a debtor files for bankruptcy is fully protected from seizure by creditors.
These rules around the 529 plan was created to prevent debtors from using 529 plans solely as a method to avoid paying creditors during bankruptcy. If you have a significant amount of money in a 529 plan, please speak with your bankruptcy attorney about how to best protect it.
About Reed Allmand
Allmand's vision is rooted in his own financially precarious childhood in Abilene "My father always had difficulty holding a job and supporting our family, so after my parents divorced when I was 12, my sister and I got jobs to help make ends meet," he recalls. "I remember what it felt like as a child to worry that our car would be repossessed or home foreclosed on."
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