If I declare bankruptcy, what will happen to tuition prepayments for my children?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Jun 29, 2022

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Tuition prepayments are structured in varying ways. In some situations, money is actually paid to a school or group of schools. In other instances, you may have money in a 529 account, a trust fund or have it set aside in some other way for your children. In the case of a bankruptcy, what happens to that money is going to depend on the tuition prepayment plan’s structure and on the bankruptcy chapter filed. 

If you file a Chapter 13 bankruptcy, your tuition prepayment is not going to be impacted in any way by your bankruptcy. A Chapter 13 bankruptcy is different from a Chapter 7 in that there is no requirement that any of your assets become part of a bankruptcy estate that is distributed to your creditors. However, while you get to keep all of your money and possessions, your debt is also not simply forgiven; instead, you must repay some portion of your debt through a repayment plan that is approved by your creditors and that lasts for between three and five years. 

If you file a Chapter 7 bankruptcy, however, it is possible your tuition prepayment could be considered an asset that you would need to release for distribution to your creditors. As a general rule, if you have the ability to revoke any sort of trust arrangement or to direct payment of the money to yourself, your creditors can reach the money you have set aside. This is true even though these plans generally get favorable tax treatment despite their revocability options. Their treatment in bankruptcy may not maintain such advantages if the plan is in your name and is in any way accessible by you. In the latter case, the exemptions available in your state will determine how much – if any – of the money you may keep.

However, if the money has already been paid to the school, or if it was transferred solely into your child’s name long ago, it may not be reachable.

You should contact an attorney in your area for advice about whether funds you pay under such a plan are beyond the reach of your creditors. A bankruptcy lawyer can help you to determine what will happen to your account and can also help you make important choices like whether Chapter 7 or Chapter 13 is the appropriate chapter of bankruptcy for you to file. 

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