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Can your financial fresh start include college savings plans?

Some of our Escondido readers may be looking for a fresh start for their financial situations. There is no denying that the national economy does not seem to be recovering as quickly as everyone would like, and as a result there are still millions of Americans who are probably beginning to consider filing for bankruptcy as part of the solution to their own economic headaches. However, one of the main factors that might hold up a final decision is the belief that filing for bankruptcy, Chapter 7 bankruptcy in particular, will result in the loss of all of the filer's assets. The fact of the matter is that this is simply not true. There are bankruptcy exemptions: assets that are protected under the law during the bankruptcy process.

A recent article touched on one aspect of asset protection that some people, parents in particular, may be especially worried about when considering filing for bankruptcy: a college savings 529 plan. These accounts have become popular savings vehicles because of their tax advantages for parents who want to make sure their child or children have funds for a college education. As the article points out, these funds may be protected from inclusion in a person's bankruptcy filing, but there are certain regulations to consider.

The most important factor in determining when the funds in a 529 plan can be claimed as a bankruptcy exemption is the timing of the start of the savings account. According to the article, if the 529 was started at least two years before a bankruptcy filing the funds in the account will not be part of the bankruptcy proceedings, as long as the named beneficiary of the account is a person's child.

This is just one example of a bankruptcy exemption. There are others, which can include funds in a 401(k) or IRA. It is important for anyone considering a bankruptcy filing to know that there may be a way to protect important assets during the process.

Source: Opposing Views, "College 529 Plan & Bankruptcy," Beverly Bird, May 7, 2013

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