Small Business Law

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Bankruptcy Attorney

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Will my Retirement Account be Seized to Pay Creditors if I File for Bankruptcy?

The short answer is, most likely, no. Whether you file for chapter 7 or chapter 13 bankruptcy protection, your retirement accounts will either not become part of your bankruptcy estate or will be exempt from your bankruptcy estate.  For practical purposes, it makes little difference whether it is excepted or exempt from bankruptcy.  The bottom line is that your retirement account will be safe from creditors, with very few exceptions.

The Supreme Court ruled in 1992 that ERISA-qualified pension and employee benefit plans do not come into the debtor’s bankruptcy estate at all.  In 2005, the bankruptcy law amendments, known as BAPCPA, essentially codified the rule that most retirement accounts were out of reach to the bankruptcy trustee.  The new Section 522(d)(12) of the Bankruptcy Code permits the debtor to exempt retirement funds to the extent they are in a fund or account that is exempt under sections 401, 403, 408, 408A, 414, 457 or 501(a) of the Internal Revenue Code. Some of the most common types of accounts inaccessible to creditors include: 401(k), 403(b), IRA (including Roth IRA), stock bonus plans, employee annuities, and profit-sharing plans.

This provision of the Bankruptcy Code, however, provides that the exemption for traditional and Roth IRA’s are limited, though the limits are quite generous.  Currently, they are capped at $1,171,650 per person.   This amount is periodically adjusted to reflect changes in the Consumer Price Index.  For a married couple filing for joint bankruptcy protection, the cap is doubled.

Because Pennsylvania offers filers the option of choosing the federal bankruptcy or state exemptions, a Pennsylvania resident may choose to utilize the Commonwealth’s exemptions to exempt retirement accounts.  However, because it rarely makes sense to choose Pennsylvania exemptions due to the stingy limits on other assets, most people choose the federal ones.  Except in rare situations, the federal exemptions will be adequate and more generous.

Although most pensions and retirement accounts cannot be accessed by the trustee for the benefit of creditors, income received from pensions or retirement accounts are considered income for bankruptcy purposes.  As such, the amount of money available to pay creditors will be affected.  Retired individuals and those approaching retirement need to pay particular attention to this issue.

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