Some Tennessee parents considering bankruptcy may be in a quandary about what to do with the college savings plan they set up for their child. You clearly don’t want to drain that account to pay back creditors, but in some cases, that unfortunate course of action may be necessary.
At the very least, holders of 529 college savings plans need to be aware of their options for protecting those assets. In particular cases, a 529 plan is exempt from being included in a bankruptcy estate.
For example, if the 529 plan was started at least two years prior to your petitioning for bankruptcy protection, then the college savings is exempt from liquidation. That is, if the person the plan was established for is your child or grandchild. You, your nieces and nephews or someone else who isn’t related to you cannot be the beneficiary of the savings plan if the money in the account is to be exempted.
What people should avoid is transferring money into a 529 plan shortly before filing for Chapter 7 protection. It may be tempting to think that the money will somehow be protected from liquidation if it’s housed in a college savings account, but the truth is that the bankruptcy court is likely to see the deposit as a fraudulent transfer.
Better to consult with your bankruptcy attorney before making any such move.
Also, it’s very important not to fail to report your 529 plan. If you do, your case might be dismissed, and there will be no legal way to stop creditors from collecting.
Source: Opposing Views, “College 529 Plan & Bankruptcy,” Beverly Bird, May 7, 2013