A 529 plan  is a tax-advantaged savings plan designed to encourage savings for future college costs. The plan is so named as it is authorized by section 529 of the Internal Revenue Code. Some 529 plans are operated by a state while others may be operated by educational institutions. All 50 states offer at least one type of 529 plan which assists parents, grandparents and other relatives in providing payment toward the cost of college tuition.
When an individual is considering the filing of a Petition for Bankruptcy, the potential loss of a college savings account maintained for a child or grandchild must be considered by both client and attorney. In order to determine if a 529 college account will be safe after the filing of a bankruptcy, it is necessary to review both federal bankruptcy laws as well as statutes specific to the state of New York.
The filing of a bankruptcy petition creates an estate pursuant to 11 U.S.C. § 541 . A Chapter 7 trustee is charged with the duty of collecting and reducing to money “the property of the estate for which such trustee serves” 11 U.S.C. § 704(1). Usually, all property of the debtor goes into the estate to be either liquidated for creditors or exempted on behalf of the debtor. In New York, an individual is allowed to use either the federal Bankruptcy Code property exemptions or the property exemptions set forth under New York State law. A debtor must have resided in the state of New York for a period of at least two years prior to the bankruptcy filing or they will be required to access the property exemptions set forth in the state of their prior residence.
Sections 541(b)(5) and (6) of the Bankruptcy Code provide that funds placed into a 529 savings plan for one year or longer, before the filing of a Petition for Bankruptcy, are exempt if the designated beneficiary is a child, stepchild, grandchild or step grandchild. The Code excludes 529 accounts because some states do not allow debtors to use federal exemptions which leaves the accounts open to attack by bankruptcy trustees. Instead of creating an exception, the Bankruptcy Code excludes 529 accounts from the bankruptcy estate itself based upon the circumstances. Section 541(b)(6) specifically provides, in part, as follows:
“(b) Property of the estate does not include… (5) funds placed in an education individual retirement account (as defined in section 530(b)(1) of the Internal Revenue Code of 1986) not later than 365 days before the date of the filing of the petition in a case under this title, but
(A) only if the designated beneficiary of such account was a child, stepchild, grandchild, or step grandchild of the debtor for the taxable year for which funds were placed in such account;
(B) only to the extent that such funds
(i) are not pledged or promised to any entity in connection with any extension of credit; and
(ii) are not excess contributions (as described in section 4973(e) of the Internal Revenue Code of 1986); and
(C) in the case of funds placed in all such accounts having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date, only so much of such funds as does not exceed $5,000;
(6) funds used to purchase a tuition credit or certificate or contributed to an account in accordance with section 529(b)(1)(A) of the Internal Revenue Code of 1986 under a qualified State tuition program (as defined in section 529(b)(1) of such Code) not later than 365 days before the date of the filing of the petition in a case under this title, but
(A) only if the designated beneficiary of the amounts paid or contributed to such tuition program was a child, stepchild, grandchild, or step grandchild of the debtor for the taxable year for which funds were paid or contributed;
(B) with respect to the aggregate amount paid or contributed to such program having the same designated beneficiary, only so much of such amount as does not exceed the total contributions permitted under section 529(b)(6) of such Code with respect to such beneficiary, as adjusted beginning on the date of the filing of the petition in a case under this title by the annual increase or decrease (rounded to the nearest tenth of 1 percent) in the education expenditure category of the Consumer Price Index prepared by the Department of Labor; and
(C) in the case of funds paid or contributed to such program having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date, only so much of such funds as does not exceed $5,000.
Outside of Bankruptcy
In some instances, a debtor may be subjected to a judgment obtained against them by a creditor. New York Civil Practice Law and Rules, § 5205 , sets forth the personal property that is exempt from application to the settlement of a money judgment as follows:
“Exemption for New York state college choice tuition savings program trust fund payment monies. Monies in an account created pursuant to article fourteen-A of the education law are exempt from application to the satisfaction of a money judgment as follows:
1. one hundred percent of monies in an account established in connection with a scholarship program established pursuant to such article is exempt;
2. one hundred percent of monies in an account is exempt where the judgment debtor is the account owner and designated beneficiary of such account and is a minor; and
3. an amount not exceeding ten thousand dollars in an account, or in the aggregate for more than one account, is exempt where the judgment debtor is the account owner of such account or accounts.”
This provision applies when an individual is sued and a money judgment is obtained and is, therefore, sometimes outside the context of a bankruptcy. Nevertheless, the statute is important as it provides a debtor with additional protection relative to a New York state college choice tuition savings program account where the account balance is less than $10,000.00 dollars.
Possible Changes in the Law
It is important to note that more bankruptcy trustees may be moving in the direction of attempting to claw back tuition payments that insolvent parents made for their children. In a May 5, 2015, Wall Street Journal  article, it was reported that in a growing number of personal bankruptcy cases, trustees responsible for collecting monies for creditor’s have moved to claw back tuition payments and that New York University was sued in October 2014 to turn over $27,152 for a Minnesota’s couple’s debts. In response to this trend Rep. Chris Collins (R, N.Y.) introduced a bill that would block bankruptcy trustees from filing such lawsuits against universities and college students to recover tuition money. This bill, called the Protecting All College Tuition Act  of 2015, was referred to the subcommittee on Regulatory Reform, Commercial and Antitrust Law on June 1, 2015, and no further progress has been made with regard to the bill as of this time.
Bankruptcy laws can be difficult to read and understand making it important to contact a skilled bankruptcy lawyer. If you are considering bankruptcy, you need a greater Long Island and New York area bankruptcy attorney who can access federal and New York laws to best protect your interests including any 529 accounts that you established for a family member. It may also be necessary to discuss non-529 plans, like UGMA plans, which may be treated differently due to the fact that they are considered property of the parent as opposed to being in the child’s name. Call the office of Ronald P. Weiss today at (631) 296-0361 in order to discuss the specifics of your financial situation and possible bankruptcy solutions.