Tag Archives: Retirement Accounts

Will My Bankruptcy Affect My Retirement Plan?

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.

Withdrawn benefits

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.

Attorney Ginger Kelly is now accepting clients in the Dudley, Webster, Sturbridge, Fiskdale, Southbridge, Saundersdale, Oxford, North Oxford, Charlton, Charlton Depot, Auburn, Leicester, Rochdale, Spencer, North Brookfield, Brookfield, East Brookfield, West Brookfield, Warren, Brimfield, Warre, Wales, Palmer and Holland Massachusetts. We accept clients from Rhode Island on a case-by-case basis.

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.
~~~~~~~~~~~~
NOTICE: This is an Advertisement. This post is not legal advice. Consult your attorney. Attorney Kelly does NOT provide legal advice to anyone via social media or anywhere over the Internet. Any and all electronic posts and writings, by Attorney Kelly, does NOT establish any type of attorney-client relationship, whatsoever, neither perceived, actual, material, implied or other. We cannot stress enough, if you need personal legal advice, always see your attorney. Do not rely upon Attorney Kelly’s posts, writings or any Internet information on websites or social media for your own personal legal advice. Seek legal advice and representation from your own personal attorney.

Copyright © 2020 by Ginger B. Kelly, Esq., all rights reserved.

Comments Off on Will My Bankruptcy Affect My Retirement Plan?

Filed under 401(k), Bankruptcy, Chapter 7, Collection, credit card debt, Debt, Debt Collection, Estate Planning, Exemption, Exemption, Financial, Financial Planning, Law, Legal, lending, loan, Loans, Massachusetts, Massachusetts law, Retirement Savings, Rhode Island, secured interest, security, tax refund, tax return, Uncategorized

I stole this title from Andy Prescott: “Think Twice Before Taking out a 401(k) Loan”

401K_dead_ground_hog

Image by Mike Luckovich, editorial cartoonist and The Atlanta Journal-Constitution’s Pulitzer Prize winner

Using a 401(k) loan to pay for things may be OK in some instances. However it’s not always a good idea, as stated in an article entitled, “Think Twice Before Taking Out a 401(k) Loan,” written by one of my favorite bloggers Andy Prescott. Andy is a CPA who writes about saving money at artofbeingcheap.com and is also a staff contributor for HowardClark.com. I enjoyed Andy’s article and, as usual, he brought up a few good points from a CPA perspective.

Then I thought about this.  Since I’m a bankruptcy attorney, why not explain how this works based on my experience and training?  Helping debtors make good choices when faced with financial problems is my business.

For quite some time now, as a general word of advice in most circumstances, I advise most clients that taking out a 401(k) retirement account loan to pay off pressing debt is probably not your best option.  Of course this depends.  Everyone’s situation is different.  Even so, especially when a person is considering bankruptcy, taking a 401(k) loan to pay off debt just complicates the whole idea of using this viable option for relief.  Not only does this complicate good decision making, it also complicates a bankruptcy discharge, trustee decisions and more.

Here’s why:

Say the bills are mounting. You are having trouble paying them. Maybe you lost your job, or had an unexpected death in the family, an unusual medical issue or recently became unemployed. Whatever the reason, bankruptcy may seem like an awesome option. Bankruptcy is a useful legal tool.  Bankruptcy is intended to help debtors in need get a fresh start. A fresh start sounds like a really good thing, right?  Well, it depends.

Often, a truly fresh start depends on the decisions a debtor makes pre-bankruptcy filing, like using a 401(k) or other retirement account loan to pay down debt.  Under current federal and local bankruptcy rules, in a Chapter 7 or Chapter 13 bankruptcy case, an ERISA qualified retirement account is a protected asset. This includes a 401(k) savings plan and most ERISA qualified retirement accounts, like IRAs, including Roth IRAs. These types of accounts are exempt from creditors claims. Great! This is the good news! A 401(k) is a protected exemption.

Now for the bad news. Suppose a debtor gets into financial trouble. The debtor is stressed and needs fast easy cash to payoff bills, maybe some medical bills or old IRS debt, maybe even the mortgage payments.  To a debtor under stress, borrowing against a 401(k) and using those funds to pay down debt seems to make sense.  It’s easy.  No credit checks required, no questions asked and there is very little paperwork. Ask and ye shall receive, the bills can be paid.  But wait!

Little did our friend the debtor realize, that if bankruptcy was ever a good option, they may have spoiled a new beginning. Borrowing against a 401(k) retirement account to pay down debt, prior to filing, will seriously jeopardize their fresh start. After all, when faced with serious financial struggles, bankruptcy should be a viable option. It’s the new alternative to the old debtor’s prison. Anyway, depending upon the circumstances bankruptcy is useful, but not if the option is compromised by poor planning and decision-making.

As a general rule, a 401(k) retirement account loan can’t be discharged under Bankruptcy. If you borrow against it, then file for bankruptcy, you have to pay the loan back according to your 401(k) retirement account plan rules. What’s done is done. There’s no going back.

On the other hand, say a debtor facing big financial trouble decides not to pay down bills by borrowing against a 401(k) or other ERISA qualified retirement account, then they find a good attorney and decide that bankruptcy is the best option, they have a great opportunity for a brand new fresh start.

If all goes well, a debtor may decide to file for bankruptcy under this set of circumstances.  The debtor will get to discharge most, if not all, insurmountable bills (most debts are forgiven under chapter 7) or pay for a short time with a reasonable payment plan and then get a full discharge (under a chapter 13).  Additionally, the debtor gets to keep all their 401(k) retirement savings!  Like magic, they get a fresh start.  Presto-chango!

Like I said before, bankruptcy is often a useful tool for those who need it.  Making wise decisions about 401(k) retirement savings accounts and other qualified ERISA retirement accounts is important.  These kinds of accounts are often overlooked valuable exempt (protected) assets under state and federal bankruptcy law.

This is one reason why it’s a good idea to think of your finances like a critically important lifetime project. “Measure twice and cut once.”  Think twice, in other words, before making big financial decisions or taking out 401(k) retirement account loans to pay debt.

Speak to your trusted attorney. Get all the facts. Plan your best course of action so your action doesn’t plan you.

Got it? Got it. Good!

~~~~~~~~~~~~

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 finance and bankruptcy.  However, Attorney Kelly is experienced in both criminal and civil trial work.  On a personal note, Attorney Kelly enjoys writing and other things, like conservation and agriculture.  To find out more visit, www.attorneykelly.squarespace.com or http://www.attorneykelly.wordpress.com, or call us at (508) 784-1444.

~~~~~~~~~~~~

NOTICE:  Attorney Kelly does NOT provide legal advice to anyone via social media or anywhere over the Internet.  Any and all electronic posts and writings, by Attorney Kelly, does NOT establish any type of attorney-client relationship, whatsoever, neither perceived, actual, material, implied or other.  We can not stress enough, if you need personal legal advice, always see your attorney.  Do not rely upon Attorney Kelly’s posts, writings or any Internet information on websites or social media for your own personal legal advice.  Seek legal advice and representation from your own personal attorney.

Copyright © 2015 by Ginger B. Kelly, Esq., all rights reserved.

1 Comment

Filed under 401(k), Bankruptcy, Financial, Legal, Retirement Savings