Discuss Educational Savings Accounts With Your Attorney Prior To Filing Bankruptcy
The case of In re Bourguignon, Ch. 7 Case No. 09-00766-TLM (Bankr. D. Idaho Sep. 23, 2009) provides yet another unfortunate example of the importance of obtaining sound advice before filing a bankruptcy case. On March 10, 2009, Christian and Tarra Bourguignon opened a 529 college savings plan for their daughter. The couple contributed $14,500 into the plan and the girl’s grandmother put in another $40,000.
Approximately two weeks after opening the 529 account Christian and Tarra Bourguignon filed for chapter 7 bankruptcy.
The bankruptcy trustee claimed that the entire 529 account was property of the estate and subject to turnover to pay the Bourguignon’s creditors. The debtors proposed several reasons that the college savings funds are protected. The court first dispensed with a preliminary argument from the debtors that section 541(c)(2) of the bankruptcy code protects the entire account as a qualifying trust. The bankruptcy court found that Christian Bourguignon is the owner of the account, and "the College Account does not contain the requisite anti-alienation and anti-assignment provisions required under nonbankruptcy law and recognized by § 541(c)(2)."
The bankruptcy court next turned to the debtors’ main argument: that the funds are excluded under Section 541(b)(6) because they were deposited within 365 days of the bankruptcy filing date. The bankruptcy court found that funds deposited in a 529 account are fully protected if deposited more than 720 days before the filing date; are protected up to $5,475 if deposited between 365 and 720 days; and are not protected at all if deposited within 365 days of the bankruptcy filing. The court also stated that the source of the funds (in this case the child’s grandmother) did not matter, and ordered the debtors to turn over the entire college savings account ($54,500 plus interest) to the trustee for payment to creditors.
There are three important lessons to be learned from this case:
- First, grandparents and other relatives should be careful when contributing to college savings plans if there is a risk of the account owner filing a Chapter 7 within two years of the contribution;
- Second, if you are experiencing financial difficulty, it is important to discuss any significant transfer of money with a qualified professional; and
- Third, it is important to discuss all of the aspects of your finances with an experienced bankruptcy attorney prior to filing your case.