Exclusions from the Bankruptcy Estate: Education Savings Plans

The general rule is that all property of the debtor becomes property of the bankruptcy estate once a bankruptcy case is filed. This property is then subject to exemption by the debtor or administration by the trustee (in a Chapter 7 case). However, there are several exclusions from the bankruptcy estate that operate to prevent property to passing into the estate upon case commencement.

Two examples are found in 11 U.S.C. 541(b)(5) and (6), colloquially known as Coverdell and 529 education savings plans/tuition credits. Funds deposited into these plans for a “child, stepchild, grandchild, or stepgrandchild of the debtor” more than two years before the filing of the bankruptcy case are entirely excluded from the bankruptcy estate. Funds deposited into plans more than one year but less than two years before the filing of a bankruptcy are excludedto the extent of $5,000. Funds deposited in the year before a bankruptcy case becomes property of the estate in their entirety.