529 Plan Bankruptcy Protection

Last year, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law. Some of the very helpful provisions in this law affect college education savings plans such as 529 plans.

The specific provisions that protect college savings from creditors are as follows:
· Full exemption is provided only for funds contributed to college savings plans more than two years prior to filing bankruptcy.
· The protection is limited to $5,000 for funds held for one to two years.
· If the account or contributions have been in place less than one year, there is no shielding from creditors.
· The education savings vehicle beneficiary must be the debtor’s child, grandchild, stepchild or step-grandchild. You cannot establish a 529 plan in your own name and take advantage of the new protections.