How Bankruptcy can Affect Children

Many people place the interests of their children above their own. As such, it is common to have concerns about how the bankruptcy process will affect your children. Some relevant questions include whether children will lose property, what happens to a child’s bank account, and whether college loans can still be obtained for the child. While it might be surprising to learn, the bankruptcy process can affect your children in a number of ways. The following will review some of the most common ways in which bankruptcy is known to affect children.

How Bankruptcy Affects the Child’s Property

While items that were given as gifts to a child are still viewed as household property, property that a child purchased will not be classified this way. The risk of losing property arises in Chapter 7 when individuals navigating bankruptcy are allowed to only keep exempt property. In many cases, however, property belonging to a child is often not of interest to bankruptcy trustees unless the items are exceptionally valuable.

Child Bank Accounts and Bankruptcy

Money that is held in a child’s bank accounts is not considered property for a bankruptcy estate. Neither a bankruptcy trustee nor creditors are able to obtain money that is placed in these accounts. Any money that a person transfers into a minor’s bank account right before filing for bankruptcy, however, will be viewed with suspicion.

The Dischargeability of Child Support in Bankruptcy

Child support is not capable of being discharged in bankruptcy. Instead, child support payments are classified as a priority debt. During chapter 7 bankruptcy, child support payments are paid first from liquidated assets. In chapter 13 bankruptcy, child support payments are also paid before other creditors. This means that bankruptcy is not a good option if a person is behind on child support payments.

529 Education Funds

Saving accounts under section 529 of the Internal Revenue Code provide substantial tax advantages including protection from people who seek repayment on a debt. While bankruptcy trustees and creditors are generally prohibited from collecting on this amount, there are several important limitations. First, a beneficiary of the account must be a child, which means that these accounts can not be used to protect money. Second, deposits that are made within a year before filing for bankruptcy are not protected.

College Education Loans

Filing for bankruptcy will not affect a child’s ability to obtain financial aid. Parents, however, will be disqualified from credit based financial aid if they declared bankruptcy within the previous five years. If a parent is prohibited from obtaining college loans for a child, however, the child will qualify for increased unsubsidized Stafford loan amounts.

Speak with an Experienced Bankruptcy Attorney

If you have questions or concerns about how the bankruptcy process will affect your children, you should speak with an experienced attorney. Attorney Jim A. Lyon has helped numerous people navigate the complex issues involved with the bankruptcy process. Contact Attorney Lyon today to schedule a consultation.