When children ask their parents about their college experience, one of the most shocking things they learn is how much it cost. Well, it is really more how much it did not cost. A lot of college grads from the baby boomer generation were able to put themselves through school without a trust fund. A great college education may have cost less than a thousand dollars per year.

In today’s dollars, that still comes nowhere close to the tuition today, which is precisely why college planning has become even more important. Parents start putting funds into a college account on the day their child is born. One way to do this is through a 529 plan, but what happens to those funds during Chapter 7 bankruptcy?

Parents don’t want their kids to go into debt because of their financial problems, whether they were caused by unemployment, medical issues or a sudden accident. But parents need to think about their future too. They can’t forgo bankruptcy just to save these funds.

While technically the college plan is considered a part of a bankruptcy estate, the good thing is that there are exemptions for certain assets, and BAPCA provides one for certain college funds.

Of course, there are some restrictions and eligibility requirements that apply. For instance, plans created within the two years prior to filing are considered suspect under the Bankruptcy Code. The amount that may be exempted could differ depeding on what exemption is used under either federal law or some state rules that apply.

The lesson to be learned here: No matter what the issue is, bankruptcy is not a one-size-fits-all process. An experienced bankruptcy attorney is a vital part of a successful bankruptcy.

Source: Opposing Views, “College 529 Plan & Bankruptcy,” Beverly Bird, May 7, 2013