3 Ways Bankruptcy Could Impact Your Kids

If you are like most parents, you worry about how the choices you make will impact your children. You want what’s best for them, even if it makes your life a bit more difficult. As parents ourselves, we get it. That’s why we are not surprised that many of our Milwaukee area clients ask us how filing for bankruptcy will impact their kids. 

The answer to that question is every lawyer’s favorite answer: it depends. Families in financial distress typically find themselves in a better situation after filing for bankruptcy, which is good for the kids. However, there are a few things you should consider if you have children and are considering filing for personal bankruptcy. Here are X of them. 

  1. Child Support Payments Will Not Be Impacted 

The bankruptcy court is not a family court, and will not make changes to child support payments. If you currently receive payments, you should continue to do so. If you currently make child support payments, you must keep paying. 

Back due child support is not dischargeable in bankruptcy. Debts that are “in the nature of support” — like medical expenses, educational expenses, etc. — are also excluded from the bankruptcy discharge.

If you liquidate assets to pay off debts, your child support obligations will be at the front of the line of creditors. If you file for bankruptcy under Chapter 13, the court will not approve your repayment plan or grant a discharge unless you are current on your payments. 

  1. Your Childrens’ Bank Accounts Are Usually Safe 

If you have opened a bank account in your child’s name, the bankruptcy court may pull any money in that account into the bankruptcy estate and use it to pay off debts. However, you may be able to keep this from happening by using an exemption depending on the amount of money in the account and your available exemptions. It is important to note that transferring money to an account set up in your child’s name shortly before filing for bankruptcy is frowned upon, and the money may be pulled into the bankruptcy estate even if you could otherwise exempt it. 

If your child’s account is an educational savings account created under section 529 of the Internal Revenue Code, the money in that account will not be pulled into the bankruptcy estate. The same goes for money that is being held in trust for your child. So if you are the custodian of a bank account set up under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act, that money is safe because it legally belongs to your child. 

  1. Applying For Student Loans 

You are probably aware that filing for bankruptcy makes it difficult to get access to credit. Parents who know their families will need to take out student loans for their children to go to college are often very worried about the impact bankruptcy might have. 

The good news is your child will not have a bankruptcy on his or her credit report because you filed for bankruptcy while he or she was a minor. He or she can apply for student loans independently, and be judged on his or her own creditworthiness. Your bankruptcy will not impact your child’s ability to obtain need-based financial aid such as Pell Grants and Stafford Loans.

Unfortunately, if your child needs additional funding, you may not be able to qualify for a PLUS Loan or Graduate PLUS Loan to help them. However, depending on your credit history and score, you may not have qualified for these loans anyway. 

Milwaukee Area Bankruptcy Attorneys You Can Trust 

If you’d like to know more about how filing for bankruptcy could affect your children, don’t hesitate to ask one of the experienced attorneys on the Hanson & Payne team. Contact us today to schedule an initial consultation.