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May/1/2011

Bankruptcy Issue

COLLEGE TUITION SAVINGS ACCOUNTS IN BANKRUPTCY
Scott T. Dillon, Esq.
Tully Rinckey, PLLC

(From the May 2011 Newsletter)

When contemplating filing for bankruptcy protection, people often ask which assets they own are protected from liquidation by a bankruptcy trustee. For some individuals, the question relates to money deposited in a college tuition savings account (“529 accounts”) on behalf of their children. Thankfully, for the children of those potential debtors, 529 accounts are protected from creditors in a bankruptcy, and those children will be able to maximize their future potential.

College tuition savings accounts are called 529 accounts in accordance with provisions of the Internal Revenue Code §529(b) (1) (A). All states, including New York, provide versions of such accounts. A 529 account is an educational savings plan which carries with it certain tax advantages and may be either a pre-paid tuition plan or a college savings plan. Earnings placed in 529 accounts are not subject to federal tax and, in most cases, state tax, so long as withdrawals are for eligible college expenses, such as tuition, room and board, according to New York’s 529 College Savings Program.

Under New York CPLR § 5205(j), “college tuition savings program trust fund payment monies” are exempt from application to the satisfaction of money judgments. In other words, creditors cannot seize that money to pay outstanding debt. When individuals file for bankruptcy in New York, they have the right to assert state property exemptions to protect their assets. Hence, by filing for bankruptcy, a person would receive the same protection of 529 accounts from “the satisfaction of money judgments;” they cannot be taken.  This exemption applies for bankruptcy in Albany for Chapter 7 and Chapter 13.

All contributions made to such an account are fully exempt from a debtor’s recoverable estate in a bankruptcy proceeding so long as 1) the account owner of such a 529 account is the judgment debtor (i.e. the party filing for bankruptcy); 2) the beneficiary of the 529 account is a minor; and 3) the 529 account was established after September 10, 1997. There is no requirement under New York law that contributions must have been made 365 days prior to the filing of the bankruptcy petition in order to be protected, as is required under federal law.

Based upon the foregoing, 529 accounts are exempt in their entirety so long as the debtor is the 529 account owner and a legal minor is the beneficiary of the account. As a result, people can have the peace of mind of knowing that filing a bankruptcy petition to obtain a financial fresh start will not jeopardize the ability of their children to go to college in the future.

Scott Dillon is the lead bankruptcy attorney for Tully Rinckey PLLC in Albany, New York






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