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How Bankruptcy Impacts Your Children

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What are the pros and cons of bankruptcy ?”


If you are considering filing for bankruptcy you likely have many thoughts swirling around your head. Concerns about your own money and how the decision to file impacts your financial life are enough to keep most people up at night. Even more stressful, is how filing for bankruptcy could impact your children. You may wonder how filing impacts money set aside for the kids, how it could impact their property and whether it could impact their education, such as private school tuition or the ability to secure student loans. To find out more, keep reading.


Child looking out window Charlotte Bankruptcy Lawyer Mecklenburg Debt AttorneyBank accounts


Rules regarding children’s bank accounts are thankfully clear. If you are holding money in trust for your children, such as a trust fund or an account that was created under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, the money is not considered part of your bankruptcy estate, it is instead considered the property of your children. As a result, the bankruptcy trustee is prohibited from getting to this money and using it to pay creditors.


College savings plans


Section 529 college savings plans are commonly used vehicles for putting money aside for your children’s education. They offer tax benefits for parents and provide much needed money for your children down the road. Thankfully, these are excluded from a person’s bankruptcy estate, meaning the money cannot be reached by the bankruptcy trustee or creditors. However, this is only the case if certain requirements are met. First, the beneficiary must be a child, stepchild or grandchild. This restriction is meant to prevent people from putting money aside in a 529 account for themselves. Additionally, the deposits need to have occurred well before the bankruptcy filing. Any deposit made within 1 year of filing will not be protected from creditors. Deposits made between 1 and 2 years before filing will be exempt up to a certain limit. Only those funds deposited at least 2 years prior to filing will be truly exempt.


Private schools and student loans


Paying tuition for private schools is questionable in certain bankruptcies. There is a very low limit set on educational expenses under the Chapter 13 bankruptcy means test. Expenses beyond this low level will only be approved on a case-by-case basis.


Filing for bankruptcy will greatly impact your ability to qualify for certain loans, though it will thankfully not impact your kids’ ability to qualify for most forms of need-based financial aid. Pell Grants and Stafford loans are available regardless of bankruptcy, though you will be disqualified from credit-based financial aid like PLUS loans. Fortunately, children denied PLUS loans qualify for increased amounts of Stafford loans, hopefully making up for any difference.


Personal property


Though your children may not see it that way, the reality is that the property in your house is considered yours for legal purposes. That means that kids’ toys, books, clothing and furniture belong to you, not the kids. Only if you can actually prove that the property was purchased with the child’s own money will these items be excluded from your property. Thankfully, you will likely hold onto much of your property in the event of a bankruptcy. Though there are limits to how much personal property can be exempted in a Chapter 7 bankruptcy, the reality is that most bankruptcy trustees realize little if any money can be obtained from selling used clothing and household furniture. Only if the items are especially valuable are they likely to be sold to pay creditors.


If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.




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