How Bankruptcy Affects Your Children’s Savings Accounts

You January be facing the specter of bankruptcy and wonder how it is going to affect money that has been set aside for your children. Will it be considered part of your assets that can be taken by the trustee assigned to your bankruptcy? This is a valid concern and the answer is: it depends. To begin with, a debtor’s assets January only be seized by the bankruptcy trustee in a Chapter 7 bankruptcy, not in a Chapter 13. Rather or not the college savings January be touched under a Chapter 7 depends on a number of factors, including the type of account the money is placed in and how recently money has been placed in it.

Typical bank accounts

If you opened a regular checking or savings account in your child’s name you are considered as an account holder until your child is 18 years of age. In a bankruptcy case, money deposited into such accounts is considered an asset of your estate and can be distributed to your creditors. The same is true if you put money into a CD in your children’s names.

You January have set an account up as a trust account for your child, but because your name is attached to it the account will undergo some major scrutiny. If you want to keep the trustee from seizing the account, you will have to prove extensively that the account was opened solely for your child’s benefit. If you have ever taken money out of the account to pay off your bills then that is considered proof that you are not maintaining the account solely for your child.

An account opened for the child under the Uniform Gift to Minors Act is not considered an asset and won’t be subject to seizure by the bankruptcy trustee. Money placed into this trust account cannot be withdrawn again. Once the minor becomes of age, the account becomes the child’s property. However, transferring money into any account for your child shortly before declaring bankruptcy will look suspiciously like an attempt to hide the money from the bankruptcy court.

529 college funds

529 college education savings plans are set up to put money aside for your child’s education. Money in these accounts can be completely protected from bankruptcy filings, but not if you fund them immediately before you file for bankruptcy. When it comes to bankruptcy, these accounts are subject to some rather intricate rules. In a nutshell, they are as follows:

  • Money deposited into a 529 account two years prior to filing is protected and cannot be seized by the court.
  • Money deposited between one year and the two year mark prior to filing receives only partial protection. The first $5000 is fully protected but any amount over that is not.
  • Money deposited less than one year before filing is not protected. Many assets can be seized by the trustee in a bankruptcy in order to pay off your creditors. However, there are legal means to protect them from creditors if they are done prior to filing. Always consult a bankruptcy attorney before you file for bankruptcy.

Never use your children as a means to attempt to protect your assets. Don’t attempt to move assets from your name into the children’s name before you file. This will appear suspicious to the trustee handling your bankruptcy case and could be considered a fraudulent transfer. As a result, you could lose your right to discharge your debts in bankruptcy altogether.

If possible, avoid the stigma of filing for bankruptcy altogether by exhausting your other alternatives beforehand. Make an effort to contact your creditors and discover what options they January offer. If this is outside your comfort zone make a comparison of debt consolidation companies and choose one that will best serve your interests.

Written by Frank McCourt, an author who writes on behalf of

Share this page: Share on FacebookTweet about this on TwitterPin on PinterestShare on LinkedInPrint this page

Leave a Reply