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Chapter 7
Chapter 7 bankruptcy, named for its chapter in the United States Bankruptcy Code, is what most people think of when they think of bankruptcy – a discharge of all of your unsecured debts and a fresh start. What most people do not realize, however, is that the process can be quite short and painless.
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Chapter 13 bankruptcy is a 3 – 5 year repayment plan in which you repay your unsecured creditors a percentage of what you owe them, based on your disposable income. Your disposable income is what you have left over each month after your expenses are deducted from your income. The less disposable income you have, the less you pay your unsecured creditors.
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Bankruptcy and Your Child’s Educational Future
Many parents are considering bankruptcy in the current down economy, yet are unsure if their filing will jeopardize their children’s financial and educational future. With the rising costs of higher education, many parents have set up college funds to make sure their children can afford to get a head start on a bright career path. Many are left wondering “Does filing bankruptcy risk these funds?”
The answer to this question is complicated, and your situation should always be discussed with a Long Beach bankruptcy attorney before proceeding with a bankruptcy filing. However, there are some basics that all parents who are struggling financially should know when contemplating the possibility of bankruptcy.
The first step is to identify the type of account that you set up for your child:
A regular bank account that is under your name will probably be considered an asset of yours. Since the account is in your name and you can readily access it to withdraw money it can be impacted by bankruptcy. However, the government has created different types of accounts that are designed for college savings, and these accounts can be protected to a certain extent by a bankruptcy attorney in Long Beach. The rules regarding these accounts are very specific and complicated, and you should always discuss the specifics with bankruptcy attorneys in Long Beach.
On the other hand, if the account is set up as a trust for your children, it may fare better. However, the type of trust determines how it is handled. Trusts such as “Totten” trusts are common, and allow the parent to cancel the trust and pull the money contributed back out. Unfortunately, since the parent has the ability to access the money, so might the bankruptcy trustee. Trusts set up under the Uniform Transfer to Minors Act (“UTMA”) are not considered assets of the parent, as contributions to these trusts are deemed irrevocable and permanent gifts to the child that cannot be taken back. In other words, since the parent can no longer touch the money, neither can the bankruptcy trustee. As long as the contributions to the UTMA account were not made to hide assets from creditors, the funds in the account are protected in bankruptcy.
This brief article is meant to introduce you to the general issues facing parents considering bankruptcy who are worried about how college savings accounts will be handled in bankruptcy. The law is very complicated in this area, and the financial and educational future of your children may be at stake. Therefore, it is always recommended that you consult an experienced Long Beach bankruptcy attorney that is familiar with these issues, such as an attorney at Wadhwani & Shanfeld, A Prof. Law Corp.
*This communication is not legal advice. You should contact an attorney for legal assistance.