Are College Savings Plans in New York City Exempt in Bankruptcy?

If you are a parent or grandparent considering bankruptcy you may have concerns over what could happen to the college savings account for your children if you decide to move forward with filing.  Understandably, the fear of risking the college education of a loved one can be enough to keep people from seeking the bankruptcy protection they deserve.   The thought of a credit card company or other toxic lender getting your child’s college savings account is unnerving to say the least, but there is good news.  Most college savings accounts can actually be protected in bankruptcy.

Like retirement accounts, college savings accounts are given some protection from federal taxes and in the bankruptcy code.  Under Federal Bankruptcy exemptions, if the 529 college savings account plan was completely funded in New York at least two years before filing your bankruptcy then in most cases the money is safe from the bankruptcy estate.  Money that placed in the educational savings account between 365 and 720 days before the Bankruptcy was filed can be exempted up to $5,850 per beneficiary, giving the balance to the bankruptcy trustee to pay off your creditors.  Money put in the funds within a year of filing bankruptcy is not exempt.  Money put in the account greater than 2 years before filing is fully exempt.

You can protect your 529 college savings plan by use of the Federal or New York State exemption system depending on how much you have in the account at the time of your bankruptcy filing.  Even if you don’t fall under the two year rule that would protect the entirety of the account, you may still be able to protect all or most of the account through the listed exemptions.  A Federal wildcard exemption will allow you to protect any asset from your bankruptcy estate up to $1,125.  Depending on your situation you might be able to combine this with an unused homestead exemption to protect your college savings account to over $12,000 even for accounts started within the last year.

New York allows bankruptcy petitioners to choose state or federal bankruptcy exemption plans, and in New York 529 College Savings plans are exempt up to $10,000.  However, if the beneficiary is  a child, stepchild, grandchild, or step grandchild, not a nephew, niece or someone unrelated to you, the amount of exemption usually unlimited.

Working with a qualified bankruptcy attorney is crucial if you are considering filing for Chapter 7 or Chapter 13 bankruptcy protection and need to protect a child’s college savings account.  If you live in New York and are looking for a proactive bankruptcy attorney that knows how to protect college savings accounts please contact the Law offices of William Waldner online or by calling 212.244.2882.  We will help make sure the college savings fund goes towards the education it was intended for and will rid you of your other unsecured debts in the process.  We make the bankruptcy easy to understand and affordable for our clients and maintain a 100% Chapter 7 Bankruptcy discharge record in New York City as of 11/19/2013.

This article is intended for educational purposes only.  By reading this article no attorney-client relationship has been created.