Shield money in bankruptcy with 529 plan

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Dear Bankruptcy Adviser,
I have cash on hand. Is it possible to save that money by putting it into a CD account under the names of my children for their college expenses, and then file for personal bankruptcy?
— Rebecca

Dear Rebecca,
It is not very likely that you would be able to protect money in this fashion. Taking your money and putting it in your kids’ names then filing for bankruptcy is an illegal transfer of funds. You would have to disclose the transfer when you file bankruptcy and the person assigned to your bankruptcy case, called a trustee, would demand that you turn over those funds. The trustee will then distribute those funds to your creditors.

There is an alternative, but it could keep you from filing for bankruptcy for quite a while.

You could create a 529 plan for your kids. A 529 education plan is a savings plan for college operated by the state or educational institution designed to help families set aside money for future educational costs. has excellent information on these plans. The College Money Guru, Joseph Hurley, CPA, discusses them regularly.

The only problem is that you cannot protect this money by simply funding a 529 plan on the eve of filing for bankruptcy. That would be an easy way for many families to “protect” money prior to filing.

The money put into a 529 account can be completely protected prior to filing bankruptcy, but just not immediately before you file. You could have been paying into this account over the years as a means to finance your kids’ college education, while you personally face financial ruin.

If you have significant money in these accounts, please consult with a bankruptcy attorney before you file. You don’t want to risk that money. Here are the basic rules:

  • Money deposited into a 529 plan over two years prior to filing is fully protected.
  • Money deposited one year or more but less than two years prior to filing is only partially protected. The first $5,000 is protected; the rest is not.
  • Money deposited less than one year before filing for bankruptcy is not protected. If you could not protect these funds in a bank account, then you cannot protect them in a 529 account.

There are assets that can be seized in a bankruptcy, but there are legal and ethical ways to properly protect them from creditors if they are done before you file for bankruptcy. You may be able to research proper ways to protect assets yourself or you may want to consult a competent attorney.

It’s important that you never intentionally hide or appear to hide assets. This could result in a denial of your right to receive bankruptcy relief.

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