Three Effects Bankruptcy Could Have on Your Children

Most people understand that a bankruptcy filing has emotional consequences for their entire family. Those with children should also understand before filing that there are financial impacts on the kids as well.

Child Support Is Ineligible for Bankruptcy Debt Discharge

If you or an ex-spouse files for bankruptcy, debts resulting from child support will not be discharged by bankruptcy. In a Chapter 7 bankruptcy filing, child support obligations become top priority when assets are being liquidated. In a Chapter 13 bankruptcy filing, child support payments will be structured within the agreed repayment plan.

This bankruptcy protection for children applies whether of not a debtor is behind on support payments. The good news is that ex-spouses may find it easier to fulfill their child support responsibilities since the bankruptcy may alleviate a majority of their debt burdens.

Bankruptcy Courts May Disallow Contributions to College Education

When an individual files for bankruptcy, the court and creditors will attempt to limit the amount of debtor expenses. Typically, the bankruptcy courts will allow necessary expenses such as housing payments, utilities, food, transportation, and medical expenses. As for luxury and entertainment expenses, the bankruptcy courts will view these less favorably.

Unfortunately, if you contribute funds towards a child's college tuition or to a future college fund, the consequences of bankruptcy could be uncertain. In some cases, bankruptcy courts or creditors may attempt to disallow these contributions, and prioritize their collection accounts above your children's education. If you find yourself in this unfortunate situation, it is strongly suggested you consult with a bankruptcy lawyer to find out how your child's education may be affected.

Your Child's Bank Accounts May Not Be Safe from Bankruptcy

One of the requirements of bankruptcy is that you must disclose all debts, liabilities, and assets. Unfortunately, bankruptcy can sometimes complicate the distinction between your assets and your children's assets. If you've opened a bank account for your child's birthday money, gift money from relatives, or funds for college tuition, it's important to make sure this account is set up correctly. If the account is just under your name or if you've drawn money out to pay your own bills, these funds could jeopardized by your bankruptcy filing.

Opening accounts under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can help protect your child's assets. These two methods are convenient, less costly, and less complicated that their trust fund counterparts. In essence, the "giver" remains custodian of these accounts until the minor reaches majority. Once the money is transferred into these custodial accounts, it can't be taken back--and thus is better protected when you file for bankruptcy.

If you think your child's future could be jeopardized by bankruptcy, a bankruptcy lawyer can examine all the details and clear any confusion.

Sources:

• U.S. Courts - Bankruptcy Basics (Child Support)
• Fairmark - UGMA & UTMA Custodial Accounts for Minors

About the Author:
Heindrick So works for a Bay Area Real Estate company that specializes in residential wholesale lending. His work experience is comprised mostly of sales and marketing background which included a high end media sales position at Magnolia Hi-fi. Heindrick is also in his final year of pursuing his Bachelor's Degree in Electrical Engineering at San Jose State University.