May 23, 2005
Bankruptcy Act Provides New Protection for Debtor's Education Savings
Esther A. Streete
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("The Act") provides new bankruptcy protections for a debtor's education savings. 11 USCS 541(b)(5); 11 USCS 541(b)(6). The Act takes effect on October 17, 2005 but does not apply to cases begun before that date.
Excluded Education Savings:
The bankruptcy estate may not include funds the debtor set aside, at least 365 days before filing the bankruptcy petition, for his or her child, stepchild, grandchild, or step-grandchild in either
- A tax-favored Code Sec. 530 Coverdell Education Savings Account (CESA), or
- A tax-favored Code Sec. 529 qualified tuition program (QTP or "529 plan").
Bankruptcy Code Sec. 541(b)(5); Bankruptcy Code Sec. 541(b)(6).
Requirements for Exclusion of CESA Funds
- The funds must be placed in the CESA at least 365 days before the date of filing the bankruptcy petition. Bankruptcy Code Sec. 541(b)(5). Funds the debtor placed in the CESA during the one-year period before he or she filed for bankruptcy and any earnings thereon will be included in the bankruptcy estate.
- The designated beneficiary of the account must be the debtor's child, stepchild, grandchild, or step-grandchild for the tax year in which the funds were placed in the account. Bankruptcy Code Sec. 541(b)(5)(A).
- The funds must not be pledged or promised to an entity in connection with any extension of credit. Bankruptcy Code Sec. 541(b)(5)(B).
- The fund must not be in excess of the annual $2,000 per-child maximum permitted under Code Sec. 530(b)(1). Bankruptcy Code Sec. 541(b)(5)(B).
The Act places a $5,000 limit on funds deposited in all CESAs having the same beneficiaries between 720 and 365 days before the bankruptcy filing date. Bankruptcy Code Sec. 541(b)(5)(B).
Requirements for Exclusion of Funds Paid to a QTP
- The funds must be used to purchase tuition credits or certificates, or contributed to the QTP, not later than 365 days before the filing of the bankruptcy petition. Bankruptcy Code Sec. 541(b)(6).
- The designated beneficiary of the amounts paid or contributed to the QTP must be a child, stepchild, grandchild, or step-grandchild of the debtor for the tax year during which the funds were paid or contributed. Bankruptcy Code Sec. 541(b)(6)(A).
