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Does Filing for Bankruptcy Affect Your Retirement Accounts? Thoughts on IRA’s, 401(k)’s, 403(b)’s, etc. with Estate Planning in Mind

Alex Moretsky

 

It should be reassuring to know that most retirement accounts are protected in bankruptcy from seizure by the bankruptcy trustee because either they are not property of the bankruptcy estate or are exempt. If they are considered property of the estate, federal and state law typically provide exemptions to protect such accounts.

Congress created the Employee Retirement Income Security Act (ERISA), whereby virtually all retirement and pension plan funds are excluded from the bankruptcy estate, including 401k, 403b, 414, 567, Roth IRA, Keogh, profit sharing, money purchase plans and defined benefits plans. The reason is ERISA-qualified retirement accounts have certain transfer restrictions which protect them from creditors. These restrictions are enforceable in bankruptcy. The only limits to the broad rule involves traditional and Roth IRAs where the exemption is limited to $1,245,475.00 (as of the writing of this article) per person for all retirement plans combined. Most individuals are unlikely to surpass this amount. Further reassurance comes in the form of roll overs. If you were laid off or changed jobs and rolled over your 401(k), for example, into an IRA, 100% of the account balance is protected in bankruptcy.

If you have retirement accounts exceeding the threshold amount, the law provides investors an incentive to keep IRAs funded with rollover salary deferral contributions separate from IRAs funded with annual contributions as the former has unlimited protections and the latter only limited.

The Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA), which made several substantial changes to the Bankruptcy Code in 2005, reinforced the fact that IRA assets from rollover of employer funded IRAs are protected without limit as are any rollover distributions. It does not, however, protect required minimum distributions. BAPCPA also added small businesses and self-employed retirement vehicles to the list of exceptions, including SEP-IRAs, Simple IRAs and Keoghs.

It is important to remember that funds withdrawn from retirement plans lose their protection, unless rolled over within 60 days into other IRA or retirement accounts. Once any portion of retirement funds are taken out prior to filing for bankruptcy, that portion is no longer off limits to the trustee. An inherited IRA is not considered a retirement account and is therefore not protected, except if inherited by a spouse and rolled over into the spouse’s IRA. But if it is not rolled over, it is considered an inheritance and therefore unprotected.

As previously mentioned, not all plans qualify for bankruptcy protection. Those that do not include the following:

  1. Employee stock purchase
  2. Improperly funded plans
  3. Plans not qualified as retirement plans under the tax code
  4. IRA inherited by someone other than a spouse
  5. Plans rolled over or transferred into a new fund not in compliance with the tax code
  6. Plans not receiving favorable determination by IRS

Before deciding to liquidate your retirement account to pay off debts, talk to a Montgomery County bankruptcy attorney to determine if you have other options. You may be able to eliminate your debts AND keep your retirement funds.

Removing Judgments on Real Estate through Bankruptcy

Alex Moretsky

A judicial lien in Pennsylvania is a non-consensual (without your agreement) lien that attaches to your property, such as a house or a car. It happens when someone, usually a creditor, sues and wins a lawsuit and gets a monetary judgment against you. The judgment is then recorded against your property, which creates a lien. The lien attaches to property you own that is located in the county in which the judgment was entered. The judgment can easily be transferred to any other county in Pennsylvania in which you own property and would attach to that property, as well.

When filing either Chapter 7 or Chapter 13 bankruptcy, the judgment lien can be eliminated or reduced by filing a Motion to Avoid Judicial Lien requesting that the lien be removed from the real estate. Two key factors must exist in order to remove the lien. First, the judgment debt must be listed on the bankruptcy petition. Second, the lien would impair some or all of the exempt equity in your property. Let’s assume you own a house with a fair market value of $250,000. You have a single mortgage with a balance of $260,000 and a judgment lien of $20,000. Given this set of facts, you could eliminate the entire $20,000 judgment lien. If we change the facts by reducing the mortgage balance to $220,000, you would be able to reduce the judgment lien by about $14,000 ($250,000 [FMV] – 220,000 [Mortgage balance] – 24,000 [exemption limit on real estate] = $6,000. Thus, $14,000 of the $20,000 judgment lien would be eliminated, while $6,000 would still exist. Changing the facts one last time, assume that the mortgage balance is $150,000. In this situation, you would not be able to eliminate or reduce any portion of the judgment lien because there is enough equity in the house to cover the lien, even when the exemption is accounted for.

While the order of discharge is effective immediately in Chapter 7 bankruptcy cases, Chapter 13 cases typically last three to five years. In some jurisdictions, once a lien is avoided in a Chapter 13 bankruptcy case, it becomes effective immediately rather than years later when the debtor receives a discharge. The reason this distinction is important is because the majority of chapter 13 cases do not make it to discharge for one reason or another. If the chapter 13 case is not discharged, then the lien remains intact, despite the bankruptcy court’s order to the contrary.
To determine whether you may discharge your liens by filing bankruptcy, contact a Montgomery County bankruptcy lawyer.

Post-Holiday Financial Blues: How Chapter 7 or 13 Bankruptcy Will Help

August 11, 2014

Alex Moretsky

Holiday time brings enormous pressure to join in the collective spirit of gift giving and indulgences. If your financial situation was already precarious this festive spending might put your monetary resources over the edge. Bankruptcy might very well be your best option. I am not advising you to purchase a 65” HDTV or top-of-the-line washer/dryer on credit with the intent of filing for bankruptcy. But if circumstances are such that you have been fighting to stay afloat for some time then the pressures of the holiday season might be the proverbial straw that breaks your financial back. Bankruptcy can help by greatly reducing or even eliminating unsecured debts such as:

  1. Revolving credit cards bills
  2. Medical bills
  3. Past due utility bills
  4. Past due rent
  5. Unsecured personal loans
  6. Debts in collection
  7. Other “open account” debt

Read More…

How Chapter 13 Bankruptcy May Save Your Home

August 11, 2014

Alex Moretsky

December 12,2014

Evidence suggests that nearly all debtors filing Chapter 13 in Pennsylvania are homeowners wishing to save their homes. Filing a Chapter 13 bankruptcy is particularly helpful to people behind on their mortgage payments who need time to catch up on those payments, but cannot afford to pay the arrearage in a lump sum. Chapter 13 provides an opportunity to delay or prevent the foreclosure on your home and pay off back debt from future income. In some cases, second and third mortgages can be eliminated. It is an opportunity to adjust financial affairs without having to liquidate your assets.
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Chapter 11 for a Small Business

August 11, 2014

Alex Moretsky

November 7, 2014

When is it appropriate for a small business to file for Chapter 11 Bankruptcy protection in Pennsylvania? Although Chapter 11 is normally associated with large corporations it is available to small businesses.
A small business is defined as a company having under 500 employees, although 96% of such businesses employ 50 or less. These small companies make up the majority of Chapter 11 filings. Small businesses, as defined by the American Bankruptcy Institute, are determined by:

  1. Whether they are closely held
  2. Whether it is owner operated
  3. The liabilities are backed by personal guarantees
  4. Have a lack of ability to afford professional fees
  5. Have less than $10 million in debt and $5 million in annual revenue

Read More…

AN UPDATE ON STUDENT LOAN DISCHARGEABILITY IN BANKRUPTCY

August 11, 2014

Alex Moretsky

September 23, 2014

Since I last wrote about this topic, there has been some slow but steady progress in expanding discharges for student loans. As a general rule, student loans are not dischargeable in Chapter 7 or Chapter 13 unless they pose an undue hardship. Commonly referred to as the Brunner Test, the case from which the name is derived, you must show that repayment would create a hardship upon you, your family and/or your dependents. The three criterion for meeting this test are as follows:

  1. Based upon your current income you cannot maintain a minimal standard of living;
  2. Your financial situation is unlikely to improve during the repayment period; and
  3. You have made a good-faith effort to repay the loans.

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CHAPTER 7: Which Debts Are Dischargeable . . . and Which Aren’t

August 11, 2014

Alex Moretsky

August 11, 2014

A major goal of most bankruptcies is the elimination of debt, i.e. freeing the debtor from personal liability. Chapter 7 bankruptcy provides individuals with the means to discharge many, but not all, types of debts. For this reason, it is important to know which debts will be discharged and which will not prior to filing for chapter 7 bankruptcy protection. Below is a catalogue of most of the common dischargeable and non-dischargeable debts.
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“When is the best time to file for bankruptcy?”

When is the best time to file for bankruptcy?

“To Stay or Walk Away: Deciding (Not) to Abandon a House with No Equity”

To Stay or Walk Away: Deciding (Not) to Abandon a House with No Equity

“The Business Debt Exemption to the Means Test for Chapter 7 Filers”

The Business Debt Exemption to the Means Test for Chapter 7 Filers