When people visit with me in one of my Indiana bankruptcy law offices, they typically have many concerns to share. It may not even be the case that these individuals or couples are on the brink of bankruptcy. They have simply followed my often-repeated advice about seeking help at the first signs of financial downslide. It might be a single mom, who got hopelessly behind on her bills after being laid off. Or it might be a business owner who’s worried about how filing a business bankruptcy might affect his family. In these and in dozens of other situations, it doesn’t necessarily mean these individuals are totally out of money. More often it means their regular income (whether business or personal) has diminished. Perhaps this is due to a business downturn, a layoff, an illness, an unexpected property tax increase, property storm damage, or even a divorce settlement. Whatever the causes, their income is no longer enough to cover the bills without invading retirement accounts or savings for children.

In former bankruptcy blogs, I’ve emphasized that money kept in retirement plans such as 401K’s is exempt from creditors under federal bankruptcy law (Money Double-Exempt In 401K). In fact, as I stressed in that earlier blog, Indiana bankruptcy law protects all kinds of employer retirement plans from creditors. And, under the newest law (I helped write these exceptions, by the way!) even Individual Retirement Accounts are protected. The concept is to provide financial security for people’s later years even though these same people are undergoing financial difficulties now. People coming to see me to discuss their options typically aren’t aware that, even were they to file bankruptcy, their retirement assets would be protected, and they find this information extraordinarily reassuring.

One kind of money that almost all parents absolutely resist touching, even when it’s tempting to do so during a financial squeeze, is savings accounts for children. Here, too, I have reassuring information to share, in particular about two types of accounts for children: college tuition savings plans called 529s, and Coverdell Education Savings Accounts or ESA’s. In bankruptcy, any money that’s been in a 529 or ESA account for longer than two years is exempt from creditors. Money that’s been in longer than a year but not quite two is exempt up to $5,000, and only money contributed within the year leading up to a bankruptcy filing can be taken by the court to pay creditors. Just as with the retirement plan money being protected for a person’s later years, here, too, there’s an underlying principle at work. Congress is recognizing the crucial importance of educating our children.

The bottom-line message in all this: As a society, we need to encourage savings to educate our young and promote savings towards retirement security for our older citizens. If things fall apart in between – that’s where the bankruptcy court safety net comes in to play.