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  • WisBar News
    January 08, 2015

    College Savings Exempt, Creditors Cannot Collect from Account Owner in Bankruptcy

    Joe Forward
    Legal Writer

    Jan. 8, 2015 – In 2009, Leonard Bronk borrowed $95,000 against his home and established five college savings accounts to benefit his grandchildren. Recently, a federal appeals court said the college savings accounts are shielded in bankruptcy because of a Wisconsin statute that allows resident debtors to shield certain property.

    Wis. Stat. section 815.18(3)(p) exempts “an interest in a college savings account” from the types of property that creditors can obtain through the execution of judgments against debtors in order to “advance the humane purpose of preserving to debtors and their dependents the means of obtaining a livelihood, the enjoyment of property necessary to sustain life and the opportunity to avoid becoming public charges.”

    In Cirilli v. Bronk, Nos. 13-1123 & 13-1516 (Jan. 5, 2015), a three-judge panel for the U.S. Court of Appeals for Seventh Circuit reversed the lower district court, which ruled that Wisconsin law only protects the “beneficiaries” of such accounts, not the “owners.”

    “The college savings accounts are exempt from execution under section 815.18(3)(p),” wrote Judge Diane Sykes, a former Wisconsin Supreme Court Justice who noted the case raises issues of first impression. “Account owners, not just account beneficiaries, may claim this exemption, and the lower courts erred in disallowing it here.”

    Bronk, retired and living in Stevens Point, incurred more than $345,000 in debts to provide for his wife’s medical care before she died in 2007. He also suffered a stroke. He sought pre-bankruptcy exemption planning advice from an attorney.

    His only significant asset was his home, and a certificate of deposit (CD) for $42,000. With the $95,000 loan against his house, he established the “Edvest” college savings accounts, which owners control. He also converted the CD to an annuity.

    After Bronk filed for Chapter 7 Bankruptcy, the bankruptcy trustee objected to the exemption planning transactions, arguing Bronk was attempting to hinder, delay or defraud creditors. The judge found no ill-intent with regard to exemption planning.

    But the judge distinguished “owners” from “beneficiaries” under Wisconsin’s exemption statute, denying exemption for the college savings accounts that Bronk owned. The annuity was exempted, however, as a “retirement benefit,” the bankruptcy judge ruled.

    On review in district court, the district judge vacated the bankruptcy court’s decision, The judge agreed that Bronk’s Edvest accounts were not exempt but remanded for fact-finding on whether the annuity qualified for exemption under section 815.18(3)(j).

    On remand, the bankruptcy judge ruled that the annuity was exempt as a “retirement benefit” under section 815.18(3)(j). Bronk appealed on the college savings issue.

    Ultimately, the three-judge panel noted the “Bankruptcy Code allows debtors to exempt certain property from the bankruptcy estate under either federal law” or their resident state, and Wisconsin allows exemptions for “an interest in a college savings account.”

    The term “interest” is not defined by the statute, the panel noted, and the trustee argued that only “beneficiaries” are protected under Wisconsin’s Edvest program. Unlike the lower courts, the three-judge panel concluded that Bronk’s interest was shielded.

    “If account owners may not invoke the general exemption in section 815.18(3)(p) … then a college savings plan can be reached by an account owner’s creditors, impairing the beneficiary’s right to qualified withdrawals,” Judge Sykes wrote for the panel.

    The panel questioned whether Bronk’s annuity was fully exempt, noting that annuities not sponsored by employers must comply with the Internal Revenue Code to be exempt under Wisconsin’s law. But the panel said that that issue was waived.

    “The trustee raised this issue for the first time in the district court, and even then simply asserted – without developing an argument – that Bronk’s annuity was not tax qualified,” Judges Sykes explained.

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