Will My Bankruptcy Affect My Retirement Plan?
By Ginger B. Kelly, Esq.
March 19, 2020
Quite often I get asked by clients and prospective clients, how will bankruptcy affect my 401(k), IRA, pension, and other retirement plan? My typical response is, “In most Chapter 7 and Chapter 13 situations, most ERISA qualified plans are exempt, meaning you can keep them, but this all depends upon your specific situation.”
What does exempt mean?
Let me explain. First, it’s important to understand the legal term, “exempt.” In the Oxford dictionary, the word exempt means, “free from an obligation or liability imposed on others.” According to Black’s Law Dictionary, exempt is a verb that means to relieve, excuse, or set free from a duty or service imposed upon the general class to which the individual exempted belongs.
Long story short, real life bankruptcy in the US today is not like Monopoly or the Game of Life. You don’t lose everything. You can exempt most possessions up to certain amounts and in some cases, in unlimited amounts. This means that you get to keep those exempt possessions if the possessions are considered exempt and you claim that exemption on your bankruptcy forms and schedules. When you avail yourself of an exemption, neither creditors nor the trustee can take that exempt thing, auction it or sell it to pay your creditors for any reason.
Which Retirement Accounts are Exempt?
When it comes to your retirement accounts, since 2005 virtually all ERISA-qualified retirement accounts and pension plan funds are exempt from creditors (however, there are some exceptions). But what is ERISA-qualified? Black’s Law Dictionary tells us that the word, “ERISA” means, Employment Retirement Income Security Act, which is, “a congressional created minimum standard that assures employees of a sound and equitable retirement plan. Certain types of ERISA retirement accounts and plans are 401(k)s, 403(b)s, RAs (Roth, SEP, and SIMPLE with a few limitations), Keoghs, profit-sharing plans, money purchase plans, and, defined-benefit plans.
Now because Chapter 7 is also known as a “total liquidation” of all your assets, actually your ERISA qualified retirement accounts are safe. The assets liquidated are only non-exempt assets. In most of joint and individual bankruptcy cases, debtors get to keep their cars, their home, their furniture and clothing, most everything they need to live and a few more things like some jewelry, some cash, burial plots, tools of the trade up to certain amounts and even a little bit extra, like ERISA qualified retirement accounts or plans. The same is true for Chapter 13 cases.
Although Chapter 13 debtors must repay creditors out of their disposable monthly income, the exemptions are the same regarding ERISA qualified retirement accounts and savings plans.
A Few Exceptions and Limitations
First, it may be important to note that most general savings accounts, investment accounts, and stock option plans are not protected if they aren’t ERISA-qualified or fall under a special wild card exemption option. Your bankruptcy attorney can discus wild card exemptions with you.
Traditional and ROTH IRAs
Since 2019, Traditional and Roth IRAs are protected under bankruptcy exemption law, up to a total value of $1,362,800. This amount adjusts every three years to account for cost of living increases. The $1,362,800 amount will adjust again in 2022. SEP and SIMPLE IRAs, similar to employer-sponsored 401(k)s, profit-sharing plans, and pensions, are fully protected in a bankruptcy.
Although the funds in your retirement accounts are exempt from creditors (subject to the limitations discussed above), retirement benefits paid to you as income aren’t exempt. Retirement benefits withdrawn and bot paid back as a loan are considered income.
If you are paying back a loan, like a 401(k) loan, and you used those funds to pay your creditors claims before filing for bankruptcy, things may be different. Speak to your bankruptcy attorney and assess what to do in this situation.
If you are withdrawing retirement funds because you are retired and at that stage of life, there is a chance you may be judgment proof and don’t need to file for bankruptcy. This is an event best discussed with our lawyer.
In a Chapter 7 bankruptcy, the trustee cannot take any retirement benefits not necessary for your support, but it may take amounts paid to you above and beyond those set limits.
In a Chapter 13 repayment plan, retirement income will help determine what portion of your unsecured debts you must repay. A portion of your retirement income may or may not be used by the trustee to pay creditors. This is why you need an attorney.
There are so many options to choose from in bankruptcy. Knowing all the ins and outs of each choice is not only difficult, it’s daunting. Different options are permissible or not, in different states. Chapter choice, timing, multiple bankruptcies and property transfers are things to think about, just to name a few. Dealing with unraveling the information and the challenging legal analysis is always best left to the professionals. My clients prefer to get the counsel of a professional. Based on our Google reviews, it is clear why our clients are satisfied and that they made a wise choice.
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We can explore whether or not bankruptcy is the easy way out for you. Our office is located in an easy-to-find place in Charlton, MA. When you arrive, you will be greeted by Attorney Kelly and meet in a very confidential and comfortable space and we typically will have a lovely pot of coffee or a cup of tea waiting for you when you arrive.
ABOUT ME: Attorney Kelly is an attorney in good standing, licensed to practice in both the Federal District and State Courts of Massachusetts and Rhode Island. Her law practice is focused on consumer debt, finance, bankruptcy and District Court matters. Attorney Kelly is experienced in both criminal and civil trial work. On a personal note, Attorney Kelly enjoys writing and other things, like agriculture, conservation and sustainable homesteading. To find out more, Google us, visit our website, find us on AVVO.com or call us at (508) 784-1444 and please, leave a detailed message, your contact information and telephone number. Attorney Kelly will return your call as soon as possible.
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