College Savings Plans (529 Plans) in Bankruptcy Cases

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Many individuals have established “529 Plans” to help fund college educations for children, grandchildren, step-children and step-grandchildren. There are several tax advantages to such plans which makes them an attractive option for many. Due to the tax advantages, many of these plans have been in effect for several years, and contributions have been made over an extended period of time. In some cases, individuals who in the past have contributed to such plans, are faced with the possibility of filing for bankruptcy. When that happens, questions regarding the treatment of such plans can be of great importance.

Generally speaking, the qualifying contributions to such accounts are not included in the bankruptcy estate of a person filing bankruptcy under Federal law. This means that most contributions will be “protected” and can remain in the 529 Plan for the future benefit of the named beneficiary. As with most good news, however, there are exceptions to this rule.

  • First, any contribution made by the bankruptcy debtor within the prior one year (365 days) before filing are not excluded form the debtors bankruptcy estate.
  • Second, contributions made by the debtor over one year but not over 720 days before filing are excluded from the bankruptcy estate but only up to $5,850. In other words contributions above $5,850 for that period are not excluded..
  • Third, all contributions made over 720 days prior to the filing date of the debtor’s bankruptcy petition are excluded.

As you can see, when it comes to protecting your 529 Plans in bankruptcy, timing of your case filing can be critical. Therefore, if you have made any contributions to a 529 Plan within the past two (2) years, you will want to seek the advice of an experienced bankruptcy attorney.

If you have not established a 529 plan, but think doing so may be a good idea, information regarding such plans can be obtained from the State of Oregon. The Oregon 529 Plan is administered by the Oregon 529 College Savings Board. More information, including the new Disclosure Booklet, can be found at www.oregoncollegesavings.com

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