It is commonly known that filing for bankruptcy can be a very trying and emotional time for those filing. But it is less common to hear about how a bankruptcy can impact the children of bankruptcy filers. If you have children or dependents and are considering bankruptcy, it is important that you understand the potential consequences bankruptcy can have on your children.
1) Unfortunately, if a debtor contributes money towards a child’s college tuition or to a college fund, filing for bankruptcy could potentially prevent these contributions from occurring. When you file for bankruptcy, the court and creditors will attempt to limit the amount of your expenses and may prioritize their collection accounts above your child’s education. While bankruptcy courts will allow necessary expenses such as housing, utilities, and food, your child’s education may not be viewed as essential. If you find yourself in this situation, I strongly recommend that you consult with a bankruptcy lawyer to understand more about how your child’s education may be affected when filing for bankruptcy.
2) When you file for bankruptcy, the line can get blurred between your assets and your child’s assets. For example, say you opened a bank account for your child but failed to take the adequate steps to set it up correctly to be protected from something like a bankruptcy. When it comes time to file bankruptcy, you may run the risk of the money in that account being considered your money and not your child’s. This type of problem can occur if the account is under just your name (and not your child’s) or if you have ever used it to pay your own bills. Your children’s assets can be better protected from bankruptcy if the accounts are opened under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). If your child’s assets are at risk of being affected by bankruptcy, I again recommend consulting a bankruptcy lawyer to help find the best means of fixing this problem.
3) Children are protected from bankruptcy whether or not an in-debt parent is behind on child support payments. Child support obligations are a top priority and are ineligible for bankruptcy debt discharge. If you file for Chapter 7 bankruptcy, child support payments become a top priority when assets are being liquidated. If you file for Chapter 13 bankruptcy, child support payments will be arranged in the repayment plan. In either case, the hope is that ex-spouses find it easier to pay child support since the bankruptcy may be able to lessen many of their other debt burdens.