Charlotte Bankruptcy attorney Bryan W. Stone answers the question: “Are my 401k and IRA protected in bankruptcy?”
If you are considering filing for bankruptcy it is important to understand exactly what you are getting yourself into. For example, you should spend some time reading up on what kinds of assets are considered exempt under bankruptcy laws and what kinds of debts may not be dischargeable. Those with retirement savings might be pleased to discover that under current laws, the vast majority of retirement accounts are considered exempt property.
In 2005, Congress passed a major overhaul to the bankruptcy system. Under the new federal laws, nearly all retirement accounts are now considered exempt, meaning that creditors will not be able to access that money if you file for bankruptcy. The rules apply across the board, to both Chapter 7 and Chapter 13 filings.
The law says that plans such as 401(k)s, 403(b)s, IRAs, SEPs and profit-sharing plans are all exempt from creditors. This means that retirement accounts that you pay into as well as pension plans paid for by your employer can all be shielded in the event of a bankruptcy filing.
The first exception to the above rule is that if the creditor that you are attempting to avoid is a government entity, likely the IRS, then no retirement accounts are protected. Though the IRS may not directly liquidate the retirement funds, it is able and willing to seize any distributions you try and take from the accounts.
One of the most important limitations to this broad exemption is in the case of traditional and Roth IRAs. The law says that while money is still exempt in IRAs, there is a cap on the exempted amount. Specifically, the rules state that the amount that can be exempted from creditors is limited to $1.2 million per person (a number that changes every few years to account for cost of living increases).
This exception to the rule means that if you have a combined amount of more than $1.2 million in your IRA or Roth IRA, the money above that amount can be seized by the bankruptcy court and used to pay creditors.
Another important caveat to this exemption is that while retirement accounts are exempt, benefits that are being paid out to individuals as income are not. That means that in the context of a Chapter 7 bankruptcy filing, the court is allowed to take any retirement benefit income above what you need for your own support and pay it to creditors. In a Chapter 13 bankruptcy, the retirement income is calculated into your repayment plan and a portion of it will go towards paying creditors.
If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC today at (704) 370-2828 or find more resources here. As professionals who are experienced in the bankruptcy arena, our attorneys will provide you with the best advice for your particular situation.
About The Author:
Bryan Stone is a Partner with Arnold & Smith, PLLC where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord tenant issues. Originally from Macon Georgia, Mr. Stone attended the University of Georgia for a BBA in Banking and Finance and went on to Wake Forest to earn his law degree. After law school Mr. Stone relocated to Charlotte where he has become quite involved in many local organizations. He is currently the Chair of “Bravo!” the young professionals organization of Opera Carolina, he also founded the UGA Alumni Association of Charlotte. In his spare time he enjoys perfecting his BBQ skills for the annual “Q-City BBQ Championships” and playing softball with the Mecklenburg County Bar Softball League.
“Can a creditor seize my retirement savings?,” published at Investopedia.com.
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