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Retirement Plans and Tuition Savings Accounts

A bankruptcy estate generally consists of all legal or equitable interests of the debtor in a property as of the commencement of the case.  Property that is not a part of the bankruptcy estate is not subject to the bankruptcy court’s jurisdiction and therefore cannot be taken to repay the creditors.

Traditionally, the treatment of retirement plans in bankruptcy has been largely dependent upon the type of plan involved. Assets in employer-sponsored, tax-qualified retirement plans such as pension, profit sharing and 401(k) plans) have generally been protected from the reach of creditors.  Under Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) all retirement funds exempt from taxation under Sections 401, 403, 408, 408A, 414, 457 and 501 of the federal tax code are now protected from the reach of creditors.

The Act also excludes from the bankruptcy estate certain education savings accounts under 11 U.S.C. §§ 541(b) (5) and (6). Section 541(b) (5) includes exclusion of Coverdell education savings accounts.  Coverdell education savings accounts are trusts created or organized in the United States exclusively for the purpose of paying the qualified education expenses of an individual who is the designated beneficiary of the trust.

11 U.S.C. § 541(b) (6) excludes funds used by the debtor to purchase tuition credit or a certificate under a qualified State tuition program within 365 days of the filing date of the bankruptcy petition. These programs are generally referred to as qualified tuition programs.   Qualified tuition programs are programs established and maintained by a State or agency or instrumentality thereof or by 1 or more eligible educational institutions, under which tuition credits for a beneficiary may be purchased.

Funds placed in a qualified state tuition program or Coverdell education savings accounts are not part of the bankruptcy estate, provided:

  • The funds are deposited into the account at least one year before filing for bankruptcy.
  • The beneficiary of the account is debtor’ child, stepchild, grandchild, step-grandchild, or in some cases, foster child.

This exclusion applies to all funds placed in the account at least two years previous to the filing date. Ever since the enactment of  BAPCPA , there has been a significant drop off in the number of cases dealing with litigable issues relating to the exclusion of education savings accounts from bankruptcy estates.

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