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Federal Appeals Court Reverses Lower Courts’ Rulings, Allowing Bankruptcy Debtor to Shield College Savings Accounts Established for His Grandchildren

In a decision released in January, the Seventh Circuit Court of Appeals reversed a lower federal district court ruling that denied a bankruptcy filer’s request to shield the funds that he had put into a college savings account benefiting his grandchildren before filing for bankruptcy. In the case of In re Bronk, Docket Nos. 13-1123 and 13-1516, the lower courts determined that the Wisconsin statutory exemption being used by the debtor to protect the assets in the college savings account only applied to the beneficiaries’ (his grandchildren’s) interest in the accounts and did not prevent the bankruptcy trustee from accessing the funds in the proceeding. As a result of this ruling, the debtor was unable to protect the assets as he had intended.

a-hallway-in-a-college-895649-mMany states have laws on the books that are designed to allow citizens to protect certain assets from being taken by the trustee after a federal bankruptcy proceeding is filed. A debtor who plans to file for bankruptcy is permitted to transfer some of his or her assets into protected accounts in anticipation of bankruptcy, as long as the transfer is not made “with intent to hinder, delay, or defraud creditors.” In the Bronk case, the debtor used $95,000 in cash that he had borrowed against his home and established five college savings accounts for his children, believing that Wisconsin’s statutory exemption for state-qualified college savings accounts would prevent the accounts from being accessed during the bankruptcy. The bankruptcy court ruled that the Wisconsin law only protected the grandchildren’s interest in the accounts and that the trustee could access the debtor’s interest and take the money as part of the bankruptcy.

The Seventh Circuit agreed with the debtor on appeal that the Wisconsin statute legitimately shielded the college savings accounts from the bankruptcy proceeding and reversed the lower court’s decision. The court reasoned that the statute directly protected the debtor’s interest in the college savings accounts, since a separate statute existed to protect the beneficiaries’ interests. The Court cast light on the language of the Wisconsin statute, stating that it was designed to help debtors “preserve to themselves and their dependents the means of obtaining a livelihood,” and it legitimized the debtor’s actions in establishing the accounts for his grandchildren. The Court also found that, although the debtor himself had full access to the accounts and could transfer or liquidate them at any time, they were still protected as college savings accounts under the statute.

The Complexities of Bankruptcy Law

Planning for and filing for bankruptcy can be one of the most complicated and difficult things for a person to do, and bankruptcy is usually only an option for people who are in a difficult situation as it is, so it is nearly impossible for a debtor to handle a bankruptcy proceeding without legal representation. A skilled bankruptcy attorney can help a debtor legally protect whatever assets they can while discharging their debts and allowing their family a fresh start. It may be possible for a debtor’s most valuable assets to be transferred into a protected account or held in trust for their dependents, but it is of utmost importance for the debtor to be sure that everything is done correctly. When an exemption is denied by the bankruptcy court, not all debtors can afford costly legal appeals to protect their assets, and a poorly planned bankruptcy can have lasting negative repercussions for a debtor and their family for generations to come.

Are you Considering Filing for Bankruptcy?

If you are considering filing for bankruptcy, you may be able to protect more of what you currently own than you think. The Louisville and Southern Indiana bankruptcy attorneys at the office of Richard A. Schwartz have the experience to help you protect your assets in the least intrusive way possible. We are familiar with the state and federal laws that have been passed to protect people like you from the lasting effects of debt, and we can help you get started down the road to a debt-free life without giving up everything you own. Contact the debt relief attorneys at the office of Richard A. Schwartz today. In Kentucky, call 502-485-9200, in Indiana, call 812-945-9200, call toll-free in either state at 866-366-3328, or simply contact us online to set up a free initial consultation.

More Blog Posts:

Bankruptcy Judge Allows Debtor To Recover Attorney’s Fees After Creditor Violated Automatic Stay, Kentucky Bankruptcy Lawyers Blog, published October 6, 2014.

Bankruptcy Court Allows Malpractice Plaintiff to Sue Surgeon in Bankruptcy, Kentucky Bankruptcy Lawyers Blog, published November 2, 2014.

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