Protecting an Education 529 Plan in Bankruptcy

Qualified state tuition programs, also known as “529 plans,” are growing in popularity as a way to save for your child’s future education.  Given the rising costs of college, having this plan waiting for your children can be one of the best gifts that you can give them.

What if you have a plan established at the time of filing for bankruptcy?

What occurs to these funds will hinge on when the funds were deposited into the account. So let’s take a look at the three time periods that matter.

Funds deposited less that 1 year prior to filing for bankruptcy: These funds are afforded no special protection. You will only have your D5 “wildcard” exemptions to protect those funds.

Funds deposited between 1 & 2 years prior to filing for bankruptcy: Under 11 USC 541(b), the first $5,000.00 deposited 12-24 months prior to bankruptcy is protected. The remaining would need to be protected with whatever D5 Wildcard exemptions you have left over.

Funds deposited more than 2 years prior to filing for bankruptcy: Under 11 USC 541(b), anything deposited into a 529 plan more than 2 years prior to filing for bankruptcy is fully protected.

Additionally, some states have special exemptions, with more loose rules, that you can use to protect these 529 plans.  Unfortunately, Michigan in behind the curve in that respect. If you have any further questions regarding 529 plans or other bankruptcy questions, please do not hesitate to contact me at (616) 920-0555 or Travis@RussellGR.com

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What are the benefits of filing for bankruptcy with my spouse?

You could receive Double Exemptions: If you live in a state that allows you to use federal bankruptcy exemptions, you can double your property exemptions when you file with your spouse. (If your state doesn’t allow federal exemptions, you might want to seek the double exemptions option on joint filing, if your state allows that). Filing for double exemption only works if you and your spouse own property together.

 

Saves time and money: Since filing fees for individual and joint applications cost the same, a couple saves money when they file together. Also , the couple would  pay attorney fees for consultancy on only one application as opposed to two.

Time wise, this process is more efficient as the couple would provide only one set of documentation.(Documentation for filing for bankruptcy needs to be extensive and detailed, going through it once is definitely less tedious). The couple would also go for hearings with a trustee together as opposed to going individually.(Only one trustee hearing is required).

 

Gets Rid of  all dischargeable debts: When only one spouse files for bankruptcy, the other would still responsible for his/her individual debt and debt incurred jointly. In a case where the couple files jointly, all the debts could be dischargeable.

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Is the Trustee a friend or a foe?

Trustees are neutral. They are supposed to be unbiased in their work, solely ensuring that the bankruptcy estate is maintained and in order. However, depending on the situation, they may seem to be a friend or a foe. Take for example, a case of fraudulent activities. Trustees are known to take fraud very seriously. If they suspect you are engaging in any fraudulent activities that undermines the bankruptcy estate, they will take action against you. In this case, they would seem to be a foe. However, in a case where they are pursuing a creditor for fraudulent activity, they may seem to be a friend as it benefits you, the filer.

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Can A Chapter 7 Bankruptcy status stop my foreclosure?

Chapter 7 bankruptcy cannot permanently stop your foreclosure, but it is helpful in other ways that can help you manage a foreclosure you are facing.

Chapter 7 bankruptcy can delay your foreclosure – When you file for bankruptcy you gain an automatic stay. Fortunately, automatic stays apply to foreclosures. So then, throughout the period of your bankruptcy, a creditor cannot pursue a foreclosure. However, after your bankruptcy is completed, he/she can proceed with a foreclosure. In most cases, the creditor can request for an automatic stay to be lifted before your bankruptcy is over. The creditor would most likely have this granted by the court if he/she is able to prove they are the legal holder of a the mortgage or deed of trust to your house.

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Bankruptcy: My spouse doesn’t want to file, is that okay? Yes.

One spouse may file a bankruptcy with or without their spouse. How much the the non-filing spouse (NFS) is involved, depends on the circumstances.

NFS is Living in the Home: Under this scenario, when the means test is completed, we must use both spouses’ income.  This doesn’t mean the NFS is actual a part of the case. We will not disclose to the court the NFS’s SSN or in most cases, even their name.  We simply have to disclose to the court what the income & expenses are for both.

NFS is NOT Living in the Home: Under this scenario, when completing the means test, we only include the your income. We will disclose to the court that you are married, but we will have to file a statement that your NFS is not living in the household with you.

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Can I prevent an eviction by filing for Bankruptcy? Yes

If you file for bankruptcy BEFORE your landlord has a Judgment For Possession, the Automatic Stay triggers protection from an unwanted eviction. At this point, your landlord would be required to file a Motion to Lift Stay in order to proceed with the eviction in Michigan Courts.

If you file for bankruptcy AFTER your landlord has a Judgment For Possession, the Automatic Stay will not automatically give you protection from an unwanted eviction. To get this protection you would need to make a deposit with the court in an amount sufficient to cure the default.

The rules above only apply in situations where  a landlord is trying to evict you from a residential property. If you are (1) being evicted from you home by your lender, post foreclosure, or (2) being evicted from a commercial property, then it does not matter whether or not a Judgment For Possession exists, the party attempting to evict you would need to lift the automatic stay before they are able to proceed with any action.

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Automatic Stay: How long does it last?

When determining how long the automatic stay will last, the first thing that needs to be determined is whether a prior bankruptcy case was dismissed in the year before the filing of the current bankruptcy.

1. If no case was dismissed in the year prior, the stay lasts until the earliest of the following:

  • The date in which an order of the court terminating the automatic stay
  • The date the case is closed
  • The date the case is dismissed
  • The date a discharge is granted or denied

2. If at least one case was dismissed in the year prior, then you must look at how many. If one case was dismissed, then the automatic stay terminates after 30 days, unless it is extended by the court after a showing the case was filed in Good Faith.

If more than one case was dismissed in the year prior to filing, no automatic stay goes into effect until Debtor files a motion with the Court requesting the stay, and they are able to show the filing was in Good Faith.

I invite you to email me at Travis@RussellGR.com with any questions you may have regarding the automatic stay, or any other bankruptcy related matter. I would love to discuss what my office can do to help you achieve long term financial stability. 

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