Are 529 Accounts Protected From Creditors?
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 bankruptcy 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 bankruptcy. That's completely false.
Are 529 Accounts Protected During Bankruptcy?
While a 529 plan designed to fund your child's college education can be protected during bankruptcy, 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.
Have Questions About 529 Accounts and Bankruptcy?
If you have any questions regarding 529 accounts and bankruptcy we are here to answer your questions. If you would like to submit a question or set up a free consultation you can contact us here