Retirement Funds in Bankruptcy
Protecting certain assets during bankruptcy proceedings helps you start over and maintain self-sufficiency. There are several types of bankruptcy filings, and they deal with debt and creditors in different ways. Generally, you get to keep most retirement assets because they are protected from bankruptcy creditors. It is important to understand what may adversely affect the protection of these assets and what you can do to further protect yourself.
Other People Are Reading
-
Employer Plans
-
Pensions and 401k retirement plans that meet the guidelines of the Employee Retirement Income Security Act of 1974 (ERISA) are generally excluded from what is called the bankruptcy estate. The bankruptcy estate includes all disposable assets that can be liquidated or used to repay or settle debts. The exception to the excluded assets is when the retirement plan supports only one individual, as is the case with some self-employment plans or single-employee corporate plans.
Individual Plans
-
Individual Retirement Arrangements (IRAs) may or may not be considered part of the bankruptcy estate. The Bankruptcy Code states that IRAs may qualify for a $1 million exemption if the assets are included in the estate, meaning they are not ERISA-qualified. This means that IRA values over $1 million may be liquidated and used to pay debts in the course of bankruptcy.
-
Retirement Plan Loans
-
An employer-sponsored plan may allow participants to borrow against their 401k up to 50 percent of the vested plan amount with a $50,000 limit. The loan is not considered a dischargeable debt. Money going toward 401k loan repayment is considered disposable; this may deter you from filing under Chapter 7 of the Bankruptcy Code. In Chapter 13, the law contains a paradox stating that the loan is protected, but the money used to repay it must be committed to creditors if the debtor makes loan payments during the Chapter 13 period. This may lead to loan default with taxes and penalties assessed as an early distribution.
Purpose
-
The law protects retirement assets during bankruptcy proceedings in order to prevent the person filing for bankruptcy from becoming a future burden on the state. If a person is able to maintain retirement assets, he is less likely to rely on public welfare systems. The bankruptcy serves as a fresh start allowing the debtor to re-establish responsible budgeting without having to rebuild a nest egg from scratch.
Strategies
-
A debtor can use different bankruptcy strategies to discharge debt and restructure assets. Chapter 7 bankruptcy discharges all debt and starts the filer at ground zero. Chapter 13 restructures debt, considering income, and works debts off over time. It is important to get sound advice from a qualified bankruptcy attorney in order to pursue the right strategies and protect retirement assets as much as possible. For those considering bankruptcy, it is important to consider deferring 401k rollovers until after bankruptcy and to look at 401k loan repayment prior to filing.
-
