Filing bankruptcy impacts every aspect of your finances. If you need to fund your child’s education, it is important to discuss the details with your bankruptcy attorney. Three common educational financing concerns during bankruptcy are: funding a 529 educational savings account, paying for private school tuition, and college loans.
Section 529 of the Internal Revenue Code makes special tax allowances for contributions to protected education accounts. These accounts are also protected from creditors (and from the trustee) during bankruptcy, but special rules apply. For instance, the beneficiary of the account must be your child, stepchild, grandchild, or step-grandchild. You cannot set up a 529 fund for yourself, then file bankruptcy and protect the money.
The timing of deposits into a 529 Plan will determine whether the money is protected. Deposits made within 365 prior to your bankruptcy filing are not protected at all. Deposits made between 365 days and 720 days prior to your bankruptcy filing are exempt up to $5,850 per beneficiary. Any deposit made over 720 days before filing bankruptcy is entirely exempt.
Private school tuition for elementary and secondary schools may or may not be allowed during a Chapter 13 bankruptcy. Congress allows an educational expense of $147.92 per month per child under the bankruptcy means test. Whether you will be allowed to pay more than that is decided on a case-by-case basis. Chapter 7 bankruptcy debtors are not prevented from paying private school tuition.
College loans may also be impacted by bankruptcy. Your bankruptcy does not affect your child’s ability to obtain need-based financial aid such as Pell Grants and Stafford Loans. However, you are disqualified from credit based financial aid like the PLUS (Parental Loan for Undergraduate Students) Loan and the Graduate PLUS Loan if you have declared bankruptcy within the past five years, unless there were extenuating circumstances or you can obtain a creditworthy cosigner.
Fortunately, your child qualifies for increased unsubsidized Stafford loan limits if you are denied a PLUS Loan. Stafford loans are advantageous because the loan remains in forbearance while the student attends school, while a PLUS Loan is subject to immediate repayment.
Bankruptcy can impact funding your child’s education. Each case is different and a qualified legal opinion is required to guide you to the most beneficial outcome. Consult with an experienced bankruptcy attorney and discuss your unique situation. Your attorney can explain your legal options.