logo logo

How will Bankruptcy Affect My Children?

If you or your spouse, ex-spouse, are considering bankruptcy you may also want to consider how this decision may impact your children in regards to their property, educational savings, tuition, child support payments, and or college / educational loans. Overall, the status of various bankruptcy and federal laws are designed to minimize impacts in regards to protecting the monetary and property rights of children. However, there are several situations in which the bankruptcy and federal courts have determined as susceptible to seizure to pay off unsecured bankruptcy debts – consequently, these situations can include monetary possessions and physical possessions of your children.

The Child’s Property:

Although physical property may have been gifted by you to your children and appear legally to be their property; as long as they are minors the property may still be considered as a part of your household. The only exemption to this rule is if it is (provable) that the child paid for the item with his or her own money – which is often the case in situations concerning teens. This means that potentially in a few cases that your child’s furniture, toys, clothes, etc. can be considered as a part of your own personal property. Depending on the type of bankruptcy you file you may or may not need to be concerned about the potential loss of your child’s property / possessions. Chapter 13 bankruptcy for example allows for the debtor to retain all of their property – including all properties utilized by children. On the other hand, Chapter 7 bankruptcies only allow for the debtor to exempt a certain amount of properties to keep. Every state allows for particular amounts of clothes and furniture and house furnishings, but these amounts vary from state to state and the bankruptcy trustee will be able to determine which properties may be exempt. The bankruptcy trustee may even allow for the retention of property even if they are not classified as exempt. This is because the trustee is primarily concerned with items within the household that are of substantial value – which generally does not include heavily used furniture / physical properties that are of daily use. However, if your child’s toys, clothing, or other physical possessions are of a very high value this may mean (although fairly rare) that the property can be seized for the use of the bankruptcy estate.

The Child’s Bank Accounts:

Money provided under the Uniform Gifts to Minors Act of the Uniform Transfers to Minors Act are moneys that you may not withdrawal for your own use and is therefore not considered your own personal money; therefore meaning it may not be considered as a part of the bankruptcy estate. This means that if you are only listed as a custodian on an account belonging to the child or some other account; such as, a trust that neither the bankruptcy trustee nor the creditors are allowed to seize this money. However, it is possible for the trustee and collectors to seize money’s applied to these accounts if it is suspected that the money was intentionally transferred to prevent the collection of the funds. For example, the money may be seized if there was a direct transfer of funds immediately prior to the debtor filing for bankruptcy. This situation is especially true if the amount of debts appear greater than the assets prior to the time of the monetary transfer – in these types of cases it is possible for the trustee to collect this money separate from the former amounts within the account.

Child Support Payments:

Under bankruptcy law child support obligations are not considered dischargeable and debts concerning child obligations may only be modified by the family court with jurisdiction. Any debts or moneys owed in relation to child support are considered priority debts and are therefore the first to be reimbursed in a Chapter 7 bankruptcy. Likewise, child support debts are also paid before creditors in Chapter 13 bankruptcies. In both cases it is generally necessary for these child support debts to be paid prior to the discharge of all other debts. The bankruptcy court in a Chapter 13 bankruptcies cannot approve the bankruptcy plan nor grant discharges in your case until there are current payments being made and all pre-filing child support debts have been fulfilled.

529 Educational Funds:

Under the Internal Revenue Code section 529 educational savings accounts are generally protected from collections by creditors. This federal bankruptcy code specifically excludes funds for the purpose of education that may otherwise be included in the bankruptcy estate. Limitations of this protection are dependent upon the beneficiary of the account and the time of the deposit. In order for the debt to be protected the beneficiary must be your child, stepchild, grandchild, or step-grandchild; and the account must not be designed to benefit yourself or for you to have access to the monetary fund’s outside of the beneficiaries educational use. Similar to other accounts educational deposits that appear to be in the attempt of transferring money to prevent the moneys collection for the purpose of bankruptcy may still be collected upon. The rule is as follows: “Under federal law deposits made between 355 – 720 days prior to the filing of the bankruptcy are only exempt up to $6,225.00 per beneficiary. And any deposits made 720 days prior to the filing of bankruptcy are entirely exempt. However, a few states have altered the amounts of the protection so it is necessary to consult the state laws in regard to statute 529.”

Private School Tuition:

Congress allows for educational expenses up to a certain amount to be included within the bankruptcy including tuition expenses for private primary and secondary schools. In Chapter 13 bankruptcy Congress permits for an educational expense to be incorporated into the bankruptcy under the “bankruptcy means test”. This expense allows for at most $1,875.00 per child per year and the allowance will be issued by the bankruptcy trustee on an individual basis. On the other hand Chapter 7 bankruptcy does not prevent the debtor from paying expenses of private school tuition.

College Education Loans:

If you do file for bankruptcy then your discharge of debt may affect your ability to obtain certain forms of financial aid. Bankruptcy does not impact your child’s ability to obtain an necessary financial aid; such as, Stafford loans of Pell Grants. On the other hand, bankruptcy does disqualify most debtors from acquiring PLUS (Parental Loan for Undergraduate Students) and Graduate PLUS loans if the bankruptcy occurred in the last five years. In some situations the bankruptcy may be overlooked if it is found that it was the result of extenuating circumstances or if the credit is substantially repaired and the individual signing on the loan appears credit – trustworthy. If your child does not qualify for a PLUS loan due to your bankruptcy then they will qualify for substantial unsubsidized Stafford Loans – which will only be required for repayment once the student is no longer attending college.

A bankruptcy may actually have more of a negative psychological impact on a child rather than the material or monetary impacts. Psychologically bankruptcy may cause children undue stress that may be trickled down from their parents’ concerns from monetary loss, employment uncertainties, and work related stress concerns during the bankruptcy process. Children are found to generally adopt the attitudes and feelings of their parents and likewise children are at high risk of developing symptomatic stress and depression that is felt by their parents during a bankruptcy or financial hardship. The bankruptcy may also impact the children by forcing unwanted change within the child’s life; such as, changes in home environment, changes in monetary standards of living, changes in residence etc. For example a child may be forced to have to change schools, move into a new house, and their parents may not be able to financially afford for them to participate in the extracurricular activities that they once enjoyed—these types of changes often negatively impact a child’s sense of self and they may be unable to cope with the transition caused by the bankruptcy.

There are certain things you may do however to minimize the chance of negative impact on your children and these are listed as follows:

1) Make sure your children are aware of what is occurring in the bankruptcy process. If you foresee that a decision in the bankruptcy may impact your children then you should openly discuss these changes with your children before a decision is made. Your children need to feel that they have some control and say in this legal process as it will minimize their feelings of lack of control. Including them in the process may also help them anticipate what may occur and reduce the fear of the unknown and feelings of hopelessness and lack of control – which are known to negatively impact the children in their day to day activities.

2) Make sure that all bankruptcy discussions are age appropriate- Make sure that all discussions actively involve conversation coming from the child to illicit their feelings and perspective. It is also important to make sure that your child can actively comprehend the information they are being told- explain everything in a way that they will understand and use analogies if necessary.

3) Make bankruptcy decisions based on the best interest of the children

4) Set a positive role model for your kids – A bankruptcy is a learning lesson for both parents and children and can demonstrate to your children the importance of resilience. By continuing to pursue your life’s goals despite certain setbacks can set a positive example for your children that can be carried into other aspects of their lives. Also the impacts of the bankruptcy may also provide you an opportunity to demonstrate to your children the importance of managing finances and balancing budgets within the home. These may in fact have a more positive impact on your children, if done correctly, and influence them to make more financially sound decisions in their future – by learning from past mistakes.

If you need to know how your bankruptcy case will impact your children then you should contact an attorney with legal experience in both family and bankruptcy law. Each individual case is different and it may be necessary to have someone analyze the case to predict the types of impact your particular case may have on your child’s future.

bottom