How Will Filing Bankruptcy Affect My Children?

If you’re a parent, your children are the most important parts of your life. You don’t want to do anything that could harm their futures. If you’re considering bankruptcy, you may be worried about the impact this will have on your children. The good news is that for those who need to file bankruptcy, the positive impact on your family will far outweigh any inconveniences. This guide examines the issues that could impact your minor children.

Will the Bankruptcy Trustee Take My Child’s Things?

Your under-aged children have no possessions of their own. With a few exceptions, you are considered the owner of the child’s possessions. As a result, the bankruptcy trustee is legally able to take your child's things, but it is very unlikely. Baseball bats, dolls, toys, and children's clothes have no resale value. An exception to this "no value" general rule would be if any of these items are valuable, either by themselves, such as expensive gaming systems or because they’re collector's items. Was the baseball bat signed by Hank Aaron or Babe Ruth? If such a signature would make the baseball bat more valuable than a “regular” bat, the bankruptcy trustee could sell the item to pay your debts.

Cars

In most states, a child under the age of 18, can't have a vehicle titled in their name. If the child's vehicle is in your name and there is no loan attached to the car, you may have unprotected equity. This can happen if you and your spouse have a vehicle that is already using all available exemptions. In that case, the bankruptcy trustee may sell the vehicle and use the proceeds to pay for your debts. If you're reading this, and you realize the car is still in your name and you find it's legal to transfer the car title to your child (because they’re old enough), don't do it. Transferring an asset, like a car, to someone else to protect it from your creditors can be considered fraudulent. Even if the vehicle has always been your child’s car, transferring it now would definitely raise some red flags. And, it doesn’t put the car out of the trustee’s reach; trustees have the power to set aside so-called fraudulent transfers.

Custodian for Minor Bank Accounts

The bankruptcy trustee typically is only interested in your child's bank account if you made recent large deposits into this type of account in an attempt to avoid paying creditors. Otherwise, the trustee won't touch this type of account. Keep in mind, they’ll still want to see statements for the account. 

Is My Child’s Work Income Included for the Calculation of the Means Test?

The Means Test determines whether you have too much income to file a Chapter 7 bankruptcy. In some cases, you will have to include your child’s income, but in most cases, you will not. The Bankruptcy Code requires that you include income earned by dependents that contribute to the payment of household expenses. The question is, was the income used to contribute to the payment of household expenses? In many cases, the child's income goes to pay for the child's recreation. For example, the child uses the money to pay for dates or nights at the movies. In this case, the child's income isn't included in the Means Test. In some cases, if your child is using all or a part of their paycheck to help out with utilities, rent, or groceries, the amount they’re contributing is considered part of your household income in the means test and on your Schedule I (Income). 

Will the Trustee Take My Child’s Income?

No, the bankruptcy trustee in a Chapter 7 bankruptcy isn't going to take your child's income. Many states also provide exemptions for the earnings of a minor, protecting what your child may have saved up from their job. 

Issues Related to Your Child’s Education

There are many issues regarding bankruptcy and your child’s education expenses. This part of this article will focus on these issues.

Private School Tuition

Private school tuition for a minor child is only excluded from Means Test expenses to the extent it exceeds $2,050.00 per child per year. The allowed amount per child updates every three years. It was last updated in April of 2019 and the next update will be in April of 2022. 

In a Chapter 13 bankruptcy, the bankruptcy trustee may not allow you to deduct any private school tuition when determining what disposable income you have available to pay your creditors. Some judges may only allow you to continue to pay private school tuition if you pay 100% to the general unsecured creditors through your Chapter 13 repayment plan. In other districts, the bankruptcy trustee and the judge may allow you to pay up to the amount allowed under the means test even if you don’t pay 100% of your unsecured debts. 

Even if the court will not allow you to pay more for your child's education expenses, you may pay the expenses out of certain types of accounts. These accounts are 529 Plans and Coverdell Education Spending Accounts (ESA). Coverdell accounts can pay qualified K-12 education expenses. Many 529 plans also allow some expenses for K-12 education. Both types of plans allow for qualified college education costs.

College Savings Plans

There are two types of education savings accounts that, to a certain extent, aren't property of the bankruptcy estate. Most states have Section 529 plans that have tax and bankruptcy exemptions. The federal government provides a similar account known as a Coverdell ESA which was once known as an “Education IRA.”

Section 529 Plans

Money deposited into a 529 plan less than one year before filing bankruptcy is not protected. In cases where there is a qualified beneficiary, for deposits made more than one year but less than two years ago, contributions to these accounts are only protected up to $5,000.00. For deposits made more than two years ago into these accounts for qualified beneficiaries, there is an unlimited exemption. Qualified beneficiaries include your child, step-child, grandchild, or step-grandchild.

Coverdell ESAs

Coverdell ESA accounts are very similar to 529 plans. For all practical purposes, the Bankruptcy Code treats these accounts the same way. There are some nuances that an experienced bankruptcy attorney can explain should the issue arise. Bankruptcy lawyers provide free consultations to determine how the bankruptcy process can help you.

Student Loan Eligibility

The Bankruptcy Code forbids denying federal student loan applications and federal financial aid grant applications because a person has filed bankruptcy. This includes Stafford Loans, Perkins Loans, PLUS Loans, and Pell Grants. There is an exception to this rule for PLUS loans. Stafford Loans, Perkins Loans, and Pell Grants are based on need, not credit reports. PLUS loans do consider credit reports.

PLUS originally stood for Parent Loans for Undergraduate Students. Now, graduate PLUS loans are available that do not require parental involvement for graduate students. The exception for PLUS loans allows the denial of these loans if you have received a Chapter 7 bankruptcy discharge in the last five years. But, a Chapter 13 discharge within the last five years would not affect your application for a PLUS Loan. Even if denied a PLUS Loan, you can still qualify by obtaining a creditworthy co-signer.

Child Support Issues

The first thing to know about child support is that it is nondischargeable regardless of the type of bankruptcy you file under. Still, bankruptcy can help you with child support. If you're behind on child support payments, you can use a Chapter 13 bankruptcy to catch-up on the amount you're behind.

As soon as you file bankruptcy, the automatic stay protects you from collection activities such as garnishments. There are certain exceptions to the automatic stay where child support is involved. Proceedings in other courts to establish or modify child support obligations, administrative withholding orders for child support, and collection of child support from property that isn’t part of the bankruptcy estate are not stopped by the automatic stay. However, the collecting parties (typically either the child’s other parent or the state agency handling the child support payments) may agree to modify these activities due to your bankruptcy filing. In a Chapter 13 bankruptcy, the collecting party may see that their interests are better protected by working within the bankruptcy system. 

If you're owed child support by someone that has filed a Chapter 7 bankruptcy, they will still owe you child support, but the discharge of their other debts makes it easier for them to pay you. Furthermore, since child support is a type of debt known as a priority debt, you will be among the first creditors paid in a bankruptcy. If the person that owes child support to you is behind on payments, they will have to catch up on the payments they owe you, through the Chapter 13 plan. If the bankruptcy court approves the Chapter 13 plan, within a few months, you will begin receiving checks from the Chapter 13 bankruptcy trustee to catch up on the amount the filer is behind. You will also continue receiving your regular child support payments. Any person that files a Chapter 13 bankruptcy can’t get a discharge on any of their debts if they're behind on their child support payments that came due after the filing of their bankruptcy case. 

Conclusion

As you can see, the risk of adverse consequences for your children is small. The benefit of being able to provide a better life for your children due to the debt relief provided by bankruptcy far outweighs the small inconveniences mentioned in this article. When the big picture is considered, bankruptcy affects you and your children in a very positive way.