Filing for bankruptcy can have a ripple effect that spreads beyond your personal finances. It may affect your spouse, and it can even affect your children. If you’re considering bankruptcy as a way of handling debt, you should understand how it can affect your children and their future as well as your own.
Your Children’s Bank Accounts Are Protected
If you have bank accounts for your children, those accounts are protected because legally, the money belongs to them and not to you. Even if you’re on the account as the custodian or as a joint owner, as long as the child is the primary account owner, creditors cannot take their money. However, be advised that transferring a lot of your money to your children’s accounts before filing bankruptcy isn’t a way of protecting those funds. The court is likely to find such an act very suspicious, and they can make that money available to creditors in some cases, especially if you’re filing Chapter 7 bankruptcy.
College Loans
Your bankruptcy will not have any effect on your child’s student loan applications, including Stafford Loan and Pell Grant applications. Any need-based college financial aid will still be available to them. Your ability to take out loans based on credit, such as PLUS loans, however, will be. If you have a bankruptcy on your credit, you will be unable to take out one of these loans for five years from the date the bankruptcy was granted. There are some extenuating circumstances that can allow you to get around this rule, but they are very rare.
Educational Funds
If you have any educational funds that fall under the IRS Section 529 funds, that money is protected from creditors as long as it’s for a child, grandchild, or a step-child/grandchild. You can’t set up an educational fund for yourself and expect it to be safe. However, any money you’ve put into one of these funds within a year is not protected, and there are some other rules to consider.
Want to know more about how bankruptcy will affect your children? Contact Michael F. Kanzer & Associates today.