Will Bankruptcy Affect Your Child’s 529 Plan in Pennsylvania?

After spending so much time, effort, and money creating and contributing to your child’s 529 college savings plan in Pennsylvania, you do not want to risk it being liquidated during bankruptcy. Our lawyers can explain the different ways you can protect a 529 plan and other assets as you repay creditors.

There are federal and state exemptions that protect 529 plan contributions during bankruptcy. Pennsylvania’s exemptions for 529 plans can be all-encompassing, so you may choose state exemptions if the 529 plan is the asset you are most concerned about safeguarding. Don’t file for bankruptcy before confirming the 529 plan is not up for liquidation, especially if you have an out-of-state plan.

Get a free and confidential case review from our Pennsylvania bankruptcy lawyers by calling Young, Marr, Mallis & Associates today at (215) 701-6519.

Is Your Child’s 529 Plan Protected from Bankruptcy?

There are federal and state protections for 529 plans in bankruptcy, and our lawyers can apply the appropriate exemptions in your Pennsylvania bankruptcy case.

Federal Protections for 529 Plans

Federal law protects some contributions made more than two years before filing for bankruptcy from the bankruptcy case.

Contributions made between one and two years before filing for bankruptcy may also be exempt from liquidation in the bankruptcy case, but to a lesser limit than older contributions.

Federal exemptions generally don’t apply to contributions made within less than a year before filing for bankruptcy.

State Protections for 529 Plans

States can provide their own exemptions for bankruptcy petitioners, and Pennsylvania’s exemptions for 529 plans are even better than federal exemptions. In Pennsylvania, the full value of a state-sponsored 529 plan is protected from creditors and during bankruptcy.

If you live in Pennsylvania but have an out-of-state 529 plan for your child, it may not be entirely protected from bankruptcy under Pennsylvania’s exemptions, so don’t file for bankruptcy before confirming your child’s 529 plan isn’t at risk.

When Can Filing for Bankruptcy Affect a 529 Plan in Pennsylvania?

Bankruptcy can sometimes affect a 529 plan, and having an attorney helps ensure that the account and other assets are properly protected.

Account Beneficiary isn’t a Qualifying Family Member

For federal exemptions, especially, the account beneficiary must be your child, stepchild, grandchild, or step-grandchild. Even if they are another close relative, like a niece or nephew, the exemptions may not apply to your bankruptcy case.

Sudden Contributions to 529 Plans Before Filing for Bankruptcy

Making significant and sudden contributions to your child’s 529 plan shortly before you file for bankruptcy can complicate your case. Recently transferred funds might be vulnerable if you cannot explain the contribution, and it seems as though you are trying to shield as much of your wealth as possible.

You Own an Out-of-State 529 Plan

If you live in Pennsylvania but have an out-of-state 529 plan for your child, it may not be entirely protected from bankruptcy under Pennsylvania’s state-specific exemptions. In this case, you may have to claim federal exemptions and may be able to exempt only some contributions.

How Do You Protect Your Child’s 529 Plan During Bankruptcy?

Keeping track of contributions, claiming the right exemptions, and filing the right chapter can help you protect your child’s 529 plan during bankruptcy.

Keep Records of Contributions

Federal exemptions for 529 plans during bankruptcy vary depending on when contributions were made. Keeping careful records of your contributions is important so that we can easily confirm exemption eligibility.

Claim the Right Liquidation Exemptions

You must specifically list all the property and assets you want to exempt from liquidation when you file Chapter 7 bankruptcy, which our Pennsylvania bankruptcy lawyers can help you do on Schedule C, a specific bankruptcy form.

File the Right Bankruptcy Chapter

You may not have to worry about creditors touching your child’s 529 plan whatsoever if you file for Chapter 13 bankruptcy instead of Chapter 7. Chapter 13 bankruptcy eligibility is determined by income, and your child’s 529 plan won’t disqualify you from filing a specific chapter.

FAQs About 529 Plans and Bankruptcy in Pennsylvania

Is a 529 Plan Considered an Asset in Bankruptcy Cases?

A 529 plan is an asset in a bankruptcy case, although our lawyers may be able to protect most or all of it from creditors during your case in Pennsylvania.

Is it Safe to File for Bankruptcy if My Child Has a 529 Plan?

If you must file for Chapter 7 bankruptcy in Pennsylvania, our lawyers may use state exemptions to protect recent contributions from creditors.

Do I Have to List My Child’s 529 Plan When I File for Bankruptcy in Pennsylvania?

You must list your child’s 529 plan along with all other assets when filing for bankruptcy, even if it is ultimately partially or fully exempt from the case.

Can I Close My Child’s 529 Plan to Avoid Bankruptcy?

You cannot liquidate your child’s 529 plan to avoid bankruptcy, as that would be considered an unqualified withdrawal and come with significant financial penalties.

Does Having a 529 Plan Affect the Bankruptcy Chapter I Can File?

Your child’s 529 plan won’t have much effect on whether you file Chapter 7 or 13 bankruptcy in Pennsylvania; rather, your income will largely influence this.

Can I Use Federal and State Exemptions to Protect My Child’s 529 Plan During Bankruptcy in Pennsylvania?

You can’t use federal and state bankruptcy exemptions when you file for bankruptcy. There are other federal and state exemptions you may need to claim that affect your decision, which our lawyers can help you make.

Why Should I Protect My Child’s 529 Plan?

If you don’t intentionally claim exemptions to protect contributions to your child’s 529 plan, creditors might take funds in the account to cover whatever debts you owe.

Call Us About Your Bankruptcy Case in Pennsylvania Today

Get a free case analysis from our Philadelphia bankruptcy lawyers by calling Young, Marr, Mallis & Associates now at (215) 701-6519.