How a bankruptcy case will affect your minor children is a legitimate concern. Parents might be wondering about things such as:
Read on for answers to these concerns.
To learn more about how bankruptcy works, see our Chapter 7 Bankruptcy and Chapter 13 Bankruptcy areas.
For the most part (see the discussion below on vehicles), property in your household belongs to the person who paid for it or received it as a gift. This applies to property your minor children purchased, unless the transaction is considered a contract. In general, minor children are not allowed to enter into contracts.
Of course, it might be difficult to trace ownership of a child's property in order to prove that it is not part of the parent's bankruptcy. Luckily, going to the trouble is probably not necessary. Unless the items in question have high values, they are safe. The bankruptcy trustee is typically not interested in used furniture or household items unless they are valuable.
Many driver-age children drive cars that are titled either in their parents' names or the child's name. The fate of the car when the parents file for bankruptcy is as follows:
When the parents hold title, the rule explained above applies: Even when the family considers the car "Junior's car," it's the property of the parents. You'll have to look to the exemption scheme for the state in which you live to determine whether the trustee might have an interest in selling your child's car. If you're using the federal exemptions (some filers have an option to use state or federal exemption tables), a vehicle your child drives might not be exempt, because the statute allows the debtor to claim an exemption of only one car. Some states are more liberal. For instance, Texas allows an exemption for any car driven by any licensed driver in the family.
If the trustee unwinds the transfer, the debtor can save the car only if it fits within an exemption. Otherwise, the trustee will sell it and pay creditor claims. The ins and outs of property ownership can be daunting to follow. Consulting a qualified attorney before you file could save you thousands of dollars and a lot of heartache.
To learn more about exemptions, see our Bankruptcy Exemptions area.
Does your child have a part-time job at a fast food joint or a business mowing lawns? If your child spent the money on date nights or athletic fees, or used the money to buy a computer or hobby equipment, the trustee isn't likely to have any interest. But this rule is subject to two exceptions.
Money held in trust for your child is not property of the bankruptcy estate. For instance, if you are the custodian of a bank account set up under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, this money is not your money and you cannot withdraw this money for yourself. Consequently, neither the bankruptcy trustee nor your creditors can get to this money, because it legally belongs to your child.
Be advised that any money you transfer into a minor's bank account before filing bankruptcy is looked upon with suspicion. If you are insolvent (generally, this means that your debts are greater than your assets) at the time you make the transfer, the Chapter 7 trustee can usually get this money.
Child support obligations are not dischargeable in bankruptcy. Owed child support obligations are priority debts and are paid first from liquidated assets in a Chapter 7 case. Child support arrears are paid before other creditors in a Chapter 13 bankruptcy. Debts that are "in the nature of support" (for example, medical expenses and educational expenses)are also excluded from the bankruptcy discharge.
Child support payments must be paid during a Chapter 13 case. The bankruptcy court cannot confirm your plan or grant a discharge in your Chapter 13 case unless you are current on post-filing child support payments.
Read more at How Will Bankruptcy Affect My Child Support Obligations?
Educational savings accounts under section 529 of the Internal Revenue Code offer significant tax advantages and protection from creditors. The federal bankruptcy code excludes 529 plan funds from property of the bankruptcy estate. That means that the bankruptcy trustee and creditors cannot collect from this fund. However, this protection is limited:
Tuition for private elementary and secondary schools may be allowed during a Chapter 13 bankruptcy. Congress allows an educational expense of $1,875 per year per child under the bankruptcy means test (this amount is subject to adjustment in April 2025). Whether you will be allowed to pay more than that will be decided by the judge in your bankruptcy case.
Chapter 7 bankruptcy won't prevent you from paying for private school tuition.
Your bankruptcy does not affect your child's ability to obtain need-based financial aid, such as Pell Grants and Stafford Loans Loans taken out by parents, however, are another story: You are disqualified from credit-based financial aid like the PLUS (Parental Loan for Undergraduate Students) Loan and the Graduate PLUS Loan if you have declared bankruptcy within the past five years, unless you can point to extenuating circumstances or you can obtain a creditworthy endorser (). Fortunately, your child qualifies for increased unsubsidized Stafford loan limits if you are denied a PLUS Loan. Stafford loans are advantageous because the loan remains in forbearance while the student attends school. A PLUS Loan is subject to immediate repayment.
To learn more about financial aid and different loan options, visit Federal Student Aid.