Does Bankruptcy Affect Your IRA or CD?
When you file for Chapter 7 bankruptcy, the court-appointed trustee may seize your assets and use them to pay your creditors. However, you may typically exclude certain types of assets from the bankruptcy estate. At the time of publication, your individual retirement account is exempt from bankruptcy proceedings, but your certificates of deposit aren't exempt.
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Bankruptcy Process
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After you file for Chapter 7 bankruptcy, the court appoints a trustee to oversee your case. The trustee inventories your estate, determines which assets he must exclude, and allows you to use the exemptions provided by your state to exclude certain other assets, such as a portion of your home or personal property. The trustee liquidates the remaining assets and uses the proceeds to pay your creditors as much as possible; the court discharges the remainder of your debts.
IRAs
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Under the Bankruptcy Abuse Prevention and Consumer Protection Act, assets in an IRA are exempt from inclusion in Chapter 7 bankruptcy proceedings. However, a debtor can't exclude more than $1 million of IRA assets from the bankruptcy estate unless the court grants him permission to exclude more. Prior to the enactment of this law, only retirement accounts covered under the Employee Retirement Income Security Act, such as employer-sponsored pension plans and 401(k)s, were exempt from Chapter 7 bankruptcy.
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CDs
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If you own CDs, the court typically requires you to include them in your bankruptcy estate. However, if your state offers a specific exemption for liquid assets held in bank accounts, the court may not exclude your CD. You may also be able to protect your CD from the bankruptcy using your state's "wild-card" exemption, which is an exemption that allows you to choose any of your nonexempt property up to a certain value and exclude it from the bankruptcy. If your CDs remain in the bankruptcy estate, the trustee liquidates them and pays the proceeds to your creditors.
Considerations
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The bankruptcy trustee only seizes and liquidates your assets if you filed Chapter 7 bankruptcy. In Chapter 13 bankruptcy, the court won't require you to surrender your property, but you must enter into a payment plan to repay your creditors. Although most CDs aren't exempt from Chapter 7 bankruptcy proceedings, CDs contained in an exempt retirement account won't typically become part of the estate.
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