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Are assets in your children's names like custodial accounts and 529 plans protected if you have to file bankruptcy?

Deborah Edwards

in Student Loans

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Heather Maxwell on March 10, 2019

I don't know anything about 529 plans, and I can't cite any law or cases, but it has been my experience in Southern Indiana at least - that trustees don't usually pursue joint accounts with balances in excess of the exemption limit IF the accounts were not funded by the debtor. In other words, if a debtor has a joint account with a child with $5,000.00 balance, and Indiana only allows a debtor to have at most $100.00 cash exemption, if the debtor can show that the account was funded by the grandparents of the child and that the debtor is the name of the account only as a custian for the child, administrators often do not pursue the funds. However, if the debtor financed the account, the trustees will normally pursue the funds. If the board cannot pursue the debtor-funded accounts, then any person who knows that he is going to file bankruptcy and that has more cash than bankruptcy allows them to maintain simply open an account in your child's name and dump all the money in cash. Another possibility: I have not had this happen, so I don't know and I'm doubtful that would work, but they can let you keep a debtor-funded joint account IF the account was funded long enough ago to convince the trustee that title to the funds did pass exclusively to the child and the debtor could not have done it in anticipation of bankruptcy because it was a long time ago (more than a year ago at least). I don't know if this would work or not, but by analogy, the debtors can put the money in their own exemptable retirement plans and insurance (in Indiana, at least) as long as the retirement plans have been funded for more than 1 year before the bankruptcy filing (since this is the amount of time Indiana decided that was long enough ago that the debtor does not dump cash into the retirement fund in anticipation of bankruptcy). My thoughts are that how each district handles this question probably varies widely from district to district, so it would be a good idea to consult a lawyer in your area. Please note that nothing in this posting or in any other posting constitutes legal advice; this is simply my understanding of the facts, which I do not warrant, and I am not suggesting any course of action or inaction to any person.


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