What happens to my 529 education account if I file for bankruptcy?
12 September 2011
It depends on a number of factors. But relatively recent changes in bankruptcy law by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) made it more likely you will be able to keep all or at least some of the funds.
BAPCPA was a sweeping change to the bankruptcy code. At the risk of oversimplifying the changes, as the name of the Act may imply, most amendments were debtor unfriendly, but some were debtor friendly. Initially, some background is necessary to understand these changes.
When someone files for bankruptcy, a bankruptcy estate is created that includes, with a few exceptions, all of the debtor’s property in whatever form in whatever place. If property is part of the bankruptcy estate, it is subject to the jurisdiction of the bankruptcy court and could be liquidated which depends on other subjects not discussed in this post. But if property is not part of the bankruptcy estate to begin with, then it cannot be liquidated.
Some of the debtor friendly amendments in BAPCPA were a few additions to the short list of items excluded from the bankruptcy estate under §541 of the bankruptcy code. One amendment covered so-called 529 education accounts. It is not as simple as thinking the entire balance in the account is excluded from the bankruptcy estate. First, the timing of when the funds were contributed to the account is crucial. Second, the designated beneficiary must be a child, stepchild, grandchild, or step-grandchild of the debtor for the tax year when the funds were put into the account. Third, is that funds contributed within 365 days of the petition date remain property of the estate. Up to $5,000.00 of the amount contributed to the account made between 365 and 720 days before the petition date are excluded from the bankruptcy estate. And all amounts contributed to an account more than 720 days before filing the bankruptcy petition are completely excluded. (There are some more qualifications in the code that are not discussed here that should be reviewed prior to settling this question.)
Just because some or all of what is in your 529 education account may be property of the estate means that it must be forfeited. Your bankruptcy lawyer can help you try and retain the funds even if they will be part of your future bankruptcy estate.
I hope that this post shows that bankruptcy may not be simple enough to be able to navigate alone. One may say they do not have a 529 education account so it does not affect them. But if it is this complicated on this somewhat obscure subject of 529 education accounts, it could be this complicated in other subjects that do affect them. I also hope that this post shows why a review of so many documents and an answer to so many of the right questions are needed prior to a bankruptcy filing. Of course, this is if one wants to know whether some of their assets will be liquidated.
If you have questions about how your 529 education account will be treated in bankruptcy or others about insolvency matters, we suggest you engage a competent Massachusetts bankruptcy attorney.
Monday, September 12, 2011
Tuesday, September 6, 2011
The new bankruptcy rules are coming!
6 September 2011
The United States Supreme Court has approved significant changes to the Rules of Bankruptcy Procedure that will take effect 1 December 2011. The most notable changes are to Bankruptcy Rule 3001 regarding requirements for creditors in the claims they make in bankruptcy cases in general; and the addition of Bankruptcy Rule 3002.1 regarding how parties are to handle claims by secured creditors against the debtor’s principal residence in chapter 13 cases. These rules are aimed to curb ongoing, recurring problems in claims in general, and claims in chapter 13 bankruptcy cases in particular, that have caused much consternation to debtors and their attorneys. Overall, these soon-to-come changes appear to be welcomed by the debtor’s bar and judges.
Rule 3001 will require all parties making claims to itemize any interest, fees, expenses, or other charges associated with their claims. It will require claims involving a security interest to state the amount necessary to “cure” any default. It will require claims involving a security interest in the debtor’s primary residence to attach an Official Form and if an escrow account is involved, a further escrow account statement must also be attached. If the Court finds that the creditor failed to provide this information, it may preclude the creditor from raising the omitted information in a further proceeding and/or award reasonable attorney fees “caused by the failure [to provide the information].”
Rule 3002.1 only applies to claims made in chapter 13 cases involving the debtor’s primary residence. However, in those types of cases the changes are significant and new steps applicable to every such case will be added. It requires a secured creditor to notify the debtor of any changes in mortgage payments no later than 21 days prior to when the new amount goes into effect while the chapter 13 case is open. It also requires a secured creditor to file an itemized statement of any fees, expenses, or charges incurred in connection with its claim after the bankruptcy case was filed, again using an Official Form. It allows a trustee or debtor to challenge this itemized statement and obtain a determination from the bankruptcy court on whether the fees, etc. are required to cure a default of the mortgage on the debtor’s primary residence. (Curing this default is arguably the most important relief available in chapter 13 and the most sought after relief from chapter 13 debtors.) George E. Bourguignon, Statutory Interpretation of Bankruptcy Code § 1322(C)(1): Arguing for a Bright-Line Approach to the Debtor’s Statutory Right to Cure a Residential Mortgage Default, Article, 7 U.C. Davis Bus. L. J. 461 (2007).
The last portion of Bankruptcy Rule 3002.1 will arguably make the most change in chapter 13 bankruptcy practice. After the debtor completes the payments required under his plan, the trustee (or debtor if the trustee fails to) must send a notice of final cure. The secured creditor must respond or consequences may flow. Without providing every detail, basically the rule is attempting to flush out and decide for good whether the debtor has cured the default, and decide this before the case closes. (In other words, there is no more arrearage due and he is back on track with the mortgage and only need to pay the usual monthly payment going forward.) It will be quite interesting if in practical reality the rule achieves its goal on this score.
These changes will make the claims process more complicated and add to the administrative and legal burden on all parties, especially in chapter 13 cases and on secured creditors of mortgages on the debtor’s primary residence. The changes will give the debtor more tools to combat unsubstantiated claims. But indirectly they may cause higher attorney’s fees by increasing the attorney’s obligations to object to claims that do not meet the new requirements that would not have been objected to previously. Exactly how much these amendments will change bankruptcy practice will remain to be seen, but we can confidently say they will change the practice to some degree. We can also say that indirectly these new rules will make it even more important for a chapter 13 debtor to obtain competent counsel to get the most from using the new rules that less competent counsel may not.
The United States Supreme Court has approved significant changes to the Rules of Bankruptcy Procedure that will take effect 1 December 2011. The most notable changes are to Bankruptcy Rule 3001 regarding requirements for creditors in the claims they make in bankruptcy cases in general; and the addition of Bankruptcy Rule 3002.1 regarding how parties are to handle claims by secured creditors against the debtor’s principal residence in chapter 13 cases. These rules are aimed to curb ongoing, recurring problems in claims in general, and claims in chapter 13 bankruptcy cases in particular, that have caused much consternation to debtors and their attorneys. Overall, these soon-to-come changes appear to be welcomed by the debtor’s bar and judges.
Rule 3001 will require all parties making claims to itemize any interest, fees, expenses, or other charges associated with their claims. It will require claims involving a security interest to state the amount necessary to “cure” any default. It will require claims involving a security interest in the debtor’s primary residence to attach an Official Form and if an escrow account is involved, a further escrow account statement must also be attached. If the Court finds that the creditor failed to provide this information, it may preclude the creditor from raising the omitted information in a further proceeding and/or award reasonable attorney fees “caused by the failure [to provide the information].”
Rule 3002.1 only applies to claims made in chapter 13 cases involving the debtor’s primary residence. However, in those types of cases the changes are significant and new steps applicable to every such case will be added. It requires a secured creditor to notify the debtor of any changes in mortgage payments no later than 21 days prior to when the new amount goes into effect while the chapter 13 case is open. It also requires a secured creditor to file an itemized statement of any fees, expenses, or charges incurred in connection with its claim after the bankruptcy case was filed, again using an Official Form. It allows a trustee or debtor to challenge this itemized statement and obtain a determination from the bankruptcy court on whether the fees, etc. are required to cure a default of the mortgage on the debtor’s primary residence. (Curing this default is arguably the most important relief available in chapter 13 and the most sought after relief from chapter 13 debtors.) George E. Bourguignon, Statutory Interpretation of Bankruptcy Code § 1322(C)(1): Arguing for a Bright-Line Approach to the Debtor’s Statutory Right to Cure a Residential Mortgage Default, Article, 7 U.C. Davis Bus. L. J. 461 (2007).
The last portion of Bankruptcy Rule 3002.1 will arguably make the most change in chapter 13 bankruptcy practice. After the debtor completes the payments required under his plan, the trustee (or debtor if the trustee fails to) must send a notice of final cure. The secured creditor must respond or consequences may flow. Without providing every detail, basically the rule is attempting to flush out and decide for good whether the debtor has cured the default, and decide this before the case closes. (In other words, there is no more arrearage due and he is back on track with the mortgage and only need to pay the usual monthly payment going forward.) It will be quite interesting if in practical reality the rule achieves its goal on this score.
These changes will make the claims process more complicated and add to the administrative and legal burden on all parties, especially in chapter 13 cases and on secured creditors of mortgages on the debtor’s primary residence. The changes will give the debtor more tools to combat unsubstantiated claims. But indirectly they may cause higher attorney’s fees by increasing the attorney’s obligations to object to claims that do not meet the new requirements that would not have been objected to previously. Exactly how much these amendments will change bankruptcy practice will remain to be seen, but we can confidently say they will change the practice to some degree. We can also say that indirectly these new rules will make it even more important for a chapter 13 debtor to obtain competent counsel to get the most from using the new rules that less competent counsel may not.
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