When people experience financial hardship they usually turn to family members for help. You may have loaned money to a family member or even taken a loan out yourself at one time or another. You may have even co-signed on a student loan or maintained a bank account for your children before they were 18. All of these things are done because we care about our loved ones and want to help them as much as we can.
But what happens when you get to the point where your financial problems are beyond what your family can help you with? You may look to the bankruptcy court as a last resort. As you go through the bankruptcy process, you will find that all of your financial transactions are an open book. If you have children, you may be concerned about their property and how filing for bankruptcy will affect them. Here are three ways that your bankruptcy may impact your children:
- Bank Accounts: When our children are young, we open up a bank account in their name so we can deposit birthday checks or money they earn. All banks require that an adult is on the account with the minor child. When you file for bankruptcy, you are required to disclose all of the bank accounts your name is associated with. Even though you're on your child's account, the money isn't yours. So what happens? If you open accounts under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), the assets will be protected. The idea behind UGMA and UTMA is that the "giver" remains the custodian account until the minor turns 18. Once the money is transferred into these custodial accounts, it can't be taken back. A gift to a minor is irrevocable. If the child is the true owner of the asset, the money doesn't come into the bankruptcy estate.
- Your Child's Property: A common question from debtors is, "Do I have to list a property that belongs to my child?" The answer is that it depends. If the child is a minor, you likely own any property that you purchased for the child such as bedroom furniture, clothing, and toys. In this case, the property is considered yours. On the other hand, if your child paid for an item with his or her own funds (and you can prove it), the item is not your property and doesn't need to be listed as your personal property. However, it should still be listed as property held for another in the statement of financial affairs. In Chapter 13 bankruptcy, you keep all of your property, whereas, in Chapter 7, you can keep all exempt property. All states allow you to exempt a certain amount of household furnishings and clothes, but the amount varies from state to state. Even if your child's furniture and property are not exempt, you will most likely keep them in bankruptcy.
- College Education Loans: Your bankruptcy will not affect your child's ability to obtain need-based financial aid such as Pell Grants and Stafford Loans. If you have declared bankruptcy within the last five years, you are disqualified from credit-based financial aid such as the PLUS loan and Graduate PLUS loan. Fortunately, your child will still qualify for increased unsubsidized Stafford loan limits if you are denied a PLUS loan. Stafford loans are usually preferred because the loan remains in forbearance while the student attends school, while a PLUS loan is subject to immediate repayment.
If you're filing for bankruptcy, the best thing you can do is to meet with an experienced bankruptcy attorney. An experienced bankruptcy attorney will help guide you through the process and will be able to explain how filing for bankruptcy will affect your children.