Americans rely on easy credit in order to fund their lifestyles. We are lured by good credit terms, the desire to buy a home, and the need to pay for things like education and home improvements. We do our best to save for our future, putting money into opens in a new windowIndividual Retirement Accounts (IRAs) or opens in a new window401Ks, money that is not to be used until retirement. When we have children we consider their futures and the ever increasing costs of college, and we want to save for our children’s future education by opening opens in a new windowEducation IRAs or opens in a new window529 Savings Plans.
In New York State, when someone obtains a money judgment against you, they have several remedies in order to obtain payment of the judgment, including garnishing your wages, putting a lien on bank accounts and other property held in your name. This may include a 529 Savings Plan. CPLR section 5205 provides several exemptions to protect debtors. It lists several types of property that cannot be reached by creditors. CPLR 5205(j) provides protection for New York 529 Savings Plans by exempting and thus protecting from creditors a New York State 529 Savings Plan in an amount not exceeding $10,000. This is good news and bad news for debtors. It protects smaller 529 plans from being plundered by a creditor, but if you’ve saved for many years, the 529 Savings Plan may exceed the $10,000 balance and is thus open season for a creditor looking for repayment of an outstanding debt.
Bankruptcy can offer better protection for a debtor who is trying to protect a 529 Savings Plan he has created for his children. Bankruptcy Code 541(b)(6) provides that funds placed in an 529 Savings Plan 1 year or longer before the date the debtor files for bankruptcy is not property of the bankruptcy estate if the designated beneficiary is a child, stepchild, grandchild or step-grandchild, and the funds contributed do not exceed the total contributions permitted. In addition, in order to ensure debtors have not transferred assets to exempt accounts in preparation of filing bankruptcy, any contributions made between year one and year two before filing are limited to a total contribution of $5,850. The exemption regarding an education IRA is similar in nature to the 529 Savings Plan, but include a requirement that the account could not be pledged to have credit extended to the debtor. This language can be found in opens in a new windowBankruptcy Code 541(b)(5).
Therefore, individuals who are contemplating bankruptcy but are concerned about 529 Savings Plans they have established for their children can now rest easy in the knowledge these accounts may be protected and may not be reached by creditors.
— by Elisa S. Rosenthal, Esq.
Law Office of Richard A. Klass
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