How Filing Bankruptcy Affects Your Children: What Parents Need to Know

Filing bankruptcy rarely has a direct negative impact on your children. For many families, it leads to more stability and less stress at home.

Your child’s belongings, income, and education savings are usually protected. Filing doesn’t stop child support payments from being made or collected.

If you owe child support, you’ll still need to stay current on payments. Wiping out other debts may make it easier to keep up. Bankruptcy can help you regain control of your finances and create a better environment for your family.

Does Filing Bankruptcy Affect My Children?

Usually, no. Most families find that bankruptcy has little to no direct negative impact on their children. In many cases, it actually improves the family’s overall well-being.

Here’s what you need to know about common concerns:

• Your kids usually won’t lose their personal belongings. Toys, clothes, and school supplies don’t have much resale value. These items are often protected by exemptions. In most cases, the bankruptcy trustee won’t be interested in these items.
• If you receive child support, it won’t be affected. If you owe child support, filing bankruptcy may help you catch up on missed payments. Chapter 13 can stop wage garnishments while you get current.
• Your child’s income usually isn’t counted in the means test. Unless your child helps cover household expenses, their income likely won’t impact your eligibility to file Chapter 7.
• Education-related expenses and savings may be affected, but protections exist. Private school tuition and college savings plans like 529 plans have exemptions. These can help protect the funds.

Bankruptcy helps you get back on stable financial ground. You can create a more secure and less stressful environment for your kids. Most parents who file say the relief from overwhelming debt allows them to better focus on their family’s future.

Will the Bankruptcy Trustee Take My Child’s Things?

It’s very unlikely that the bankruptcy trustee will take any of your child’s belongings. Most children’s items don’t have any resale value. Toys, clothes, sports gear, and school supplies aren’t worth the trustee’s time.

The law generally treats anything your minor child owns as something you technically own. If an item does have real value, it could become part of your bankruptcy case. A valuable gaming system or collectible item might interest the trustee. In most cases, everyday items your child uses aren’t worth enough to matter.

Will the Trustee Take My Kid’s Car?

In most states, those under 18 can’t legally have a car titled in their name. If your child drives a car, there’s a good chance it’s titled in your name.

If that car is fully paid off and you’re already using your vehicle exemptions on other cars, the bankruptcy trustee might see it as unprotected property. They could sell it to help pay your creditors.

Be careful about transferring the car title to your child before filing bankruptcy. Moving assets out of your name right before filing may be considered a fraudulent transfer. Bankruptcy trustees can undo those types of transfers and still take the car if it has value.

What if I’m a Custodian for Minor Bank Accounts?

If your child has a bank account, the trustee usually won’t take any money from it. One red flag would be large deposits you recently made to shield money from your creditors. In that case, the trustee may investigate further.

Even if the trustee doesn’t plan to take the money, they may still ask to review recent bank statements. Have those ready just in case.

Is My Child’s Work Income Included for the Calculation of the Means Test?

The means test determines whether you qualify for Chapter 7 bankruptcy based on your income. If someone in your household earns money, including your child, that income might need to be included. In most cases, a child’s work income won’t count.

The key question is whether your child’s income helps cover household expenses. If your child uses their paycheck for movies, clothes, or personal activities, that money usually doesn’t count in the means test.

However, if your child regularly contributes to rent, groceries, or utilities, the trustee may include that amount. You’ll need to report this on Schedule I, which lists all income sources in your household.

Will the Trustee Take My Child’s Income?

Typically, no. Chapter 7 bankruptcy trustees don’t usually take children’s income. Many states provide exemptions for the earnings of a minor. What your child has saved from their job is usually protected.

How Will Bankruptcy Affect My Child’s Education Costs and Savings?

Bankruptcy usually doesn’t stop you from paying for your child’s education. It may affect how certain expenses and savings accounts are treated in your case.

Private School Tuition

If your child attends private school, this expense might be partly allowed in your Chapter 7 bankruptcy case. Only a portion of private school tuition can usually be considered a reasonable expense. The current means test form shows the monthly allowable expense as $214.58.

If you file Chapter 13, the court may not allow you to deduct any private school tuition. You’ll need to pay 100% of your unsecured debts through your repayment plan. In some districts, trustees and judges are more flexible. They may allow up to the same amount permitted under the means test.

If the tuition expense isn’t allowed in your Chapter 13 budget, some parents choose to pay it from a 529 plan. You can also use a Coverdell Education Savings Account. These accounts can cover qualified education costs, including some K-12 expenses and college tuition.

If you’re considering bankruptcy and need guidance on protecting your family’s assets, you can speak with a bankruptcy attorney for free to understand your options.

Education Savings Accounts: 529 Plans and Coverdell ESAs

Both 529 plans and Coverdell ESAs help families save for education. In bankruptcy, parts of these accounts may be protected, but not always fully.

• 529 plans: If you made contributions to a 529 account more than two years before filing, that money is usually fully protected. The account must be set up for a qualified beneficiary like your child, stepchild, or grandchild. Contributions made between one and two years before filing are only protected up to $5,000. Contributions made within one year of filing aren’t protected at all.
• Coverdell ESAs: These accounts work much like 529 plans. They receive the same treatment under bankruptcy law. You can use them for K-12 and college expenses. The timing of your contributions matters for protection.

Can Bankruptcy Affect My Child’s Ability to Get Student Loans or Financial Aid?

Filing bankruptcy doesn’t prevent your child from getting federal student loans or financial aid. The law protects access to most federal programs. Stafford Loans, Perkins Loans, and Pell Grants remain available even if you filed bankruptcy.

There’s one exception: PLUS Loans may be denied if the person applying received a Chapter 7 discharge in the last five years. A Chapter 13 discharge usually doesn’t affect eligibility.

Even if a PLUS Loan is denied because of bankruptcy, your child may still qualify. They can apply with a creditworthy co-signer.

Most federal student aid doesn’t look at credit history at all. Need-based programs like Pell Grants and Stafford Loans remain accessible. Bankruptcy generally won’t get in the way of your child getting financial help for college.

How Does Bankruptcy Affect Child Support?

Filing bankruptcy doesn’t erase child support obligations. It can play an important role if you’re behind on payments or waiting on support owed to you.

If You Owe Child Support

Child support is considered a priority debt. You can’t discharge it in bankruptcy, no matter which chapter you file. If you’re behind on payments, Chapter 13 bankruptcy can help you catch up in a more manageable way.

When you file, the automatic stay goes into effect. This usually stops most collection actions, like wage garnishments. However, child support is treated differently. Some actions might still continue, depending on the situation.

Many parents find that filing Chapter 13 gives them breathing room. Past-due child support can be included in your repayment plan and paid off over time.

You must stay current on new child support payments during your bankruptcy. If you’re behind on payments that come due after filing, you won’t be able to complete your case. You won’t receive a discharge of your other debts.

If You’re Owed Child Support

If someone who owes you child support files bankruptcy, they’re still responsible for making those payments. Child support can’t be discharged. You’ll remain a priority creditor in their case.

If they file Chapter 13, the amount they owe you in back child support must be included in their repayment plan. Once the court approves that plan, you should start receiving payments from the bankruptcy trustee. These payments are separate from any ongoing support, which they must continue to pay.

If they file Chapter 7, their child support debt stays in place. Wiping out their other debts might make it easier for them to stay current on support moving forward.

Key Takeaway

Filing bankruptcy might feel overwhelming, especially when you’re thinking about how it could affect your children. In most cases, the impact on your kids is minimal. The long-term benefits can be life-changing. Getting relief from debt can reduce stress at home and free up money for essentials. You can create a more stable future for your family. For many parents, the peace of mind that comes with a fresh start makes a big difference for everyone in the household.