Those filing for bankruptcy are often concerned about how their Chapter 7 or Chapter 13 bankruptcy filing will affect their children. Let’s take a closer look at the impact bankruptcy has on the children of filers:
Child’s Property Status
It’s important to understand that any property you’ve purchased, even if it was purchased for your child—clothing, furniture, toys, books—is considered your property for the purposes of the bankruptcy case. However, if you can prove that the property was purchased with your child’s income it would not be included in your bankruptcy estate. For example, if your child was employed or received some other type of income in their name, providing a receipt that proves the property was purchased with funds from the child’s bank account might be sufficient enough to exclude the property from your bankruptcy estate. In any case, most personal and household property is either exempt or not valuable enough to be seriously considered for liquidation by the bankruptcy trustee.
Child Support Income
In most states, child support income that’s been saved in a bank account is exempt in bankruptcy, but check with your attorney to make sure this will apply to your case. You’ll need to prove that the money in your account is in fact child support income.
Child’s Financial Assets
Bank accounts and college savings accounts in your child’s name are exempt in bankruptcy. Creditors and the bankruptcy trustee cannot liquidate your child’s financial account such as a custodial bank account or a 529 college savings account as long as you haven’t recently deposited cash into the account in an attempt to shelter assets. Any deposit made to your child’s financial account less than 365 days before filing bankruptcy may be seized by the bankruptcy trustee and used to repay creditors. However, deposits made anytime between 365 and 720 days before filing bankruptcy are exempt, and deposits (in any amount) made more than 720 days before filing bankruptcy are exempt.
Bank accounts and college savings accounts in your child’s name are exempt in bankruptcy.
Bankruptcy filers are generally allowed $1,875 in educational expenses for minor children, but you should check with your bankruptcy attorney to explore how trustees in your area view tuition payments, especially if you’re filing a Chapter 13 bankruptcy and you are discharging a significant amount of unsecured debt.
College Student Loans
The good news is that your college-aged child won’t be prevented from taking out student loans because you’ve filed bankruptcy. However, you will be excluded from taking out loans on their behalf. But if you’re denied a PLUS loan, your child may automatically qualify to take out a larger loan on their own.
If you’re concerned about the financial impacts your bankruptcy will have on your kids, discuss your situation with an attorney.