Filing for bankruptcy can be a welcomed opportunity for financial relief and a fresh start in the face of escalating debt and nagging creditors. Once you’ve made the decision to file for bankruptcy, you can start the process of resolving your debt and the weight of your financial burden will lighten. However, for families across Alabama, bankruptcy brings up a long list of questions and concerns about how this financial salve will affect the future of any children involved. Will your children lose any property? What happens to your kids’ bank accounts? Will you or they ever be able to apply for college loans?
These are necessary and important questions that any concerned parent considering bankruptcy would ask. The number one priority is protecting the future of your family. Here’s a quick primer on how bankruptcy will affect your children immediately and in the long run.
Whether you will be able to keep your children’s property depends on what kind of bankruptcy you file for. Chapter 13 bankruptcy typically allows you to keep your possessions, while Chapter 7 bankruptcy liquidates some of your assets. Depending on the specifics of your financial situation, you may not be able to choose what kind of bankruptcy to file for. Your children’s bedroom furniture, clothes, toys, and electronics are all considered your property, even though you have gifted them to your kids. Under Chapter 7 bankruptcy, this property is not automatically exempt, but you are allowed a limited amount of exemptions that you can certainly use for your children’s property. Furthermore, if you have proof that your child paid for property with their own money, those items aren’t a part of your bankruptcy estate and can’t be touched. Luckily, even if your children’s property is not exempt, there is a low risk of you losing these items. In bankruptcy, used furniture and household goods aren’t typically of interest unless they are very valuable.
In terms of your children’s bank accounts, money housed in a trust for your kids is not part of the bankruptcy estate. Money that legally belongs to your children, whether in a bank account set up under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, can’t be touched by creditors or a bankruptcy trustee. However, be aware that transferring money into a child’s bank account before filing bankruptcy is suspicious.
Similar to how bankruptcy affects your children’s bank accounts, money contained in an educational savings account under section 529 of the Internal Revenue Code is protected from the bankruptcy estate, but there are conditions. The recipient of the account must be a child, stepchild, grandchild, or grand-stepchild, and deposits of funds must be made 720 days prior to filing bankruptcy to be completely exempt.
Regarding the application of college loans, your bankruptcy does not fully affect your child’s ability to obtain financial aid. They will not be able to apply for credit-based loans, such as PLUS or Graduate PLUS loans, but Pell Grants and Stafford Loans are still accessible.
Additionally, money reserved for private school tuition may have a cap under Chapter 13 bankruptcy. Congress generally allows about $1,875 per year per child, but whether you will be allowed more than that is determined on a case-by-case basis. Under Chapter 7 bankruptcy, private school tuition will not be affected.
Obligated child support payments cannot be alleviated in bankruptcy. These are considered priority debts and are paid first before creditors and deducted first from liquidated assets. One of the only ways child support payments can be discharged is in the event that you are current on child support payments after filing Chapter 13 bankruptcy.
The ins and outs of how filing bankruptcy will affect your family life is complex to understand alone. If you are considering filing for bankruptcy and have concerns about how this will impact your future, consult the wisdom of a knowledgeable bankruptcy lawyer in Birmingham. At [firm-name], we know that filing for bankruptcy is a difficult decision, but our legal team can guide you through the entire process. Don’t hesitate to contact our Birmingham offices at [phone-number] for well-versed legal support in your case.