What Are The Different Types Of Bankruptcies
When we talk about personal bankruptcy cases we are generally referring to Chapter 7 and Chapter 13.
A Chapter 7 case is a âtotal liquidationâ bankruptcy, where at the successful conclusion of the case most, if not all, of your debts are discharged. This means that any expensive property is sold off to pay your debts and any eligible debts that remain get erased.
A Chapter 13 case, in contrast, involves paying back a percentage of your debts through a three to five year repayment plan. This is usually based on a number of factors including your income and types of debt.
Although your retirement income is a factor in either a Chapter 7 or a Chapter 13 case, this article will primarily focus on what occurs during Chapter 7.
Will A Reverse Mortgage Help
Reverse mortgages are designed to let you access your home’s equity without leaving your home. Your home equity is the difference between the value of your home and the balance of your mortgage. If your home is worth $150,000 and you owe $100,000 on your mortgage, you have $50,000 in equity.
In exchange for either monthly payments, lump-sum payments, or lines of credit, you agree to relinquish your house to the lender once you pass away or permanently move. This provides an income stream and allows you to continue living in your home during your retirement.
Consult your state and federal exemption guidelines to determine if the equity in your home is protected. Some states allow you to protect 100% of the equity, but most states limit the amount.
Second and vacation homes don’t have the same protections in bankruptcy that primary residences do.
Some Accounts Are Shielded From Creditors But Not Always Completely
All types of individual retirement accounts, or IRAs, recognized under the federal tax code enjoy substantial protection from creditors during a bankruptcy. Protection for IRAs was signed into law by President George W. Bush under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Protection under this law varies, depending on the type of IRA. Traditional IRAs and Roth IRAs are currently protected to a value of more than $1 million. SEP IRAs, SIMPLE IRAs, and most rollover IRAs are fully protected from creditors in a bankruptcy, regardless of the dollar value.
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Should I Cash Out My 401k Before Filing Bankruptcy
ERISA 401K plans are protected from bankruptcy, but not all 401K plans are ERISA. If youre considering bankruptcy, please contact us today for a free consultation and we will evaluate your case and review your options.
Protected assets, such as those in an ERISA 401k, can not be pursued by creditors in the event of a bankruptcy filing. Your retirement fund will continue to grow until maturity, and can be withdrawn normally at that time.
If the assets are removed early however, that money loses its tax deferred status and is subject to income taxes. Additionally, anything purchased with it are now assets that can be seized by creditors.
In many cases reducing your expenses and tightly controlling your budget in order to pay your bills is a much better strategy when compared to cashing out your retirement account earlier than planned.
Is my 401k ERISA Qualified?
People with 401k plans who are filing bankruptcy are often asked by their bankruptcy lawyer to obtain proof that their 401k plan is ERISA qualified.
Most employer sponsored 401k plans are indeed ERISA qualified.
ERISA is an acronym for the Employee Retirement Income Security Act. You can read more about this act on the US Department of Labors website here: ERISA. It is rare but some 401k plans are not ERISA qualified, such as government employees. Government employees usually have government retirement plans.
- Los Angeles County
K And Bankruptcy Chapters
First, you need to understand that the chapter of bankruptcy you file affects the handling of your 401k. Retirement savings is handled differently in Chapter 13 than it is in Chapter 7.
In Chapter 13, your debt is paid out of your disposable income through a three- to five-year payment plan. Your property is not liquidated, which means your retirement savings, as well as your other assets, are safe.
Things are different when you file for Chapter 7. In Chapter 7 bankruptcy, the trustee liquidates your assets and uses the proceeds to pay a portion of your debt. The good news is the asset liquidation does not include your 401k. Your 401k retirement savings is protected as long as it qualifies under the Employee Retirement Income Security Act. Most plans do, as long as your employer contributed. However, double-check this before you file.
To learn more about the differences between Chapter 7 and Chapter 13 bankruptcy, check out this information from Credit Karma.
An experienced bankruptcy attorney protects your 401k and helps you make decisions about filing if any of your savings is at risk. Even if your plan does not qualify, there might be additional ways in which it is protected.
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What Happens To My 401k If I File Bankruptcy
Probably not. Regardless of how much you have saved in your 401, 403, 457, Keogh or other profit-sharing or defined benefit plan, the money in these retirement accounts cannot be touched by creditors if you file Chapter 7 bankruptcy, nor will they affect the amount you pay back when filing Chapter 13 bankruptcy.
How Does Ira Bankruptcy Protection Work
IRA bankruptcy protection covers all types of IRAs: traditional IRAs, Roth IRAs, SEP-IRAs, SIMPLE IRAs, and rollover IRAs. In some cases, protection extends only up to a certain dollar amount, which increases regularly.
Here is a summary of IRA bankruptcy protection, according to the BAPCPA, based on the type of IRA:
- Traditional IRAs and Roth IRAs: Historically, the limits on bankruptcy protection for these IRAs have been adjusted every three years. The adjustment in 2019 raised the limit to $1,362,800 from $1,283,025. The next increase will go into effect on April 1, 2022.
- and SIMPLE IRAs: These IRAs are designed for self-employed individuals and small businesses. They receive the same protection as traditional IRAs and Roth IRAs, but there is no limit on the amount that is protected.
- Rollover IRAs: BAPCPA identifies rollover IRAs as a traditional IRA or Roth IRA that was originally funded by a rollover transfer from an employer-sponsored retirement plan such as a traditional 401 or Roth 401. Like SEP and SIMPLE IRAs, protection on these accounts is not capped.
The bankruptcy protection limit placed on traditional and Roth IRAs covers the vast majority of account holders because the account balance maximum is higher than most IRA investors are likely to achieve through a combination of their contributions and the gains made on them during their working years. In addition, BAPCPA permits the protected amount to exceed the limit “if the interests of justice so require.”
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Your 401 Is Generally Safe From Commercial Creditors
The reason your 401 and other qualified retirement plans are off-limits to commercial creditors is rooted in their special legal status. Under the Employment Retirement Income Security Act of 1974 , the funds in your 401 only legally belong to you once you withdraw them as income. Until then, they’re legally the property of the plan administratoryour employerwho cannot release them to anyone but you.
This ERISA protection means that savings held in a regular 401 are shielded from garnishment by commercial creditors, even if you file for bankruptcy. Indeed, the protection for the funds held in 401 accounts is greater than for those held in an IRA, which are not covered by ERISA and are only protected to a certain limit. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 , $1 million of your IRA savings is exempt from garnishment in the event of bankruptcy.
It’s worth noting, however, that funds are protected only as long as they are in your 401 account. Once you withdraw them, for any reason, those distributions are fair game for creditors to pursue.
What Types Of Retirement Accounts Are Always Protected In A Bankruptcy
Not everything is at risk in a bankruptcy case. Some assets are excluded from ever being considered part of the bankruptcy estate, while other assets are considered exempt.
If property is âexcluded,â it means that it is not eligible to be considered during your case. If property is âexempt,âit means that the type of property is usually considered during your case, but there are laws that allow you to protect up to a certain amount of it.
You will need to check both your stateâs bankruptcy exemptions and the federal bankruptcy exemptions. Although they donât always choose to do so, states are permitted to offer their own exemptions which can differ from the federal ones. In those instances , you can which you would prefer to file under.
When an asset is excluded or properly exempted in a bankruptcy filing, it is protected from being sold by the Trustee.
Below we will examine the specific types of retirement accounts that generally protected during bankruptcy.
ERISA-qualified plansCongress changed the Bankruptcy Code in 2005 and declared that any retirement account that falls under the Employee Retirement Income Security Act as an âERISA-qualified pension planâ is fully protected and will be completely excluded from the bankruptcy estate. These accounts include:
money purchase plans, and
IRAs and Roth IRAsAlthough IRAs and Roth IRAs generally qualify under ERISA, there are a few ways that they differ from other accounts.
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Is Your 401 Protected If Your Employer Goes Out Of Business
If you invest in your company’s 401 plan, you know that your pre-tax savings comes out of your paycheck each period and is invested in one or more investment vehicles, usually mutual funds. But you may wonder if your employer ever sees any of that money, other than any contribution it may provide. Very simply, your employer is not legally allowed to hold your 401 money. Under federal law, all 401 money must be held in a trust or in an insurance contract that’s separate from your employer’s assets. Therefore, neither your employer nor any of your employer’s creditors can grab that 401 money.
That said, there are certain circumstances in which you may not receive all the funds you expected if your employer goes out of business.
Special Protection For Rollover Iras
For the purposes of BAPCPA, a rollover IRA is a traditional or Roth IRA account that was originally funded through a transfer from a qualified retirement plan. Qualified retirement plans include standard 401 plans, traditional pension plans, and certain profit-sharing plans. Under BAPCPA, a properly executed rollover IRA originating from a qualified retirement plan is fully shielded from creditors in a bankruptcy.
Keep in mind that once the rollover of assets is complete, a rollover IRA is not essentially different from any other traditional or Roth IRAapart from the source of the assets. To ensure full protection for a rollover IRA originating from a qualified retirement plan, it is a good idea to create a separate IRA account for the rollover assets distinct from any other existing traditional or Roth IRA.
While the maintenance of separate accounts is not explicitly required under law, it helps to avoid potential issues during a bankruptcy proceeding. With separate accounts, the origin of assets is easy to document and the asset pools are easy to track for purposes of securing all available bankruptcy protections.
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Is My Ira Protected If I Claim Bankruptcy
Bankruptcy is not something most of us ever want to consider. But in uncertain times like these, its a reality some could soon be facing.
Federal bankruptcy law applies to all bankruptcies and provides some universal rules and protections for the individual filing for bankruptcy. For example, federal law generally precludes retirement savings from being accessible to creditors. Each state can create additional laws regarding the types of property that may be exempt from a bankruptcy estate , such as a home or a vehicle. In many states, bankruptcy filers may choose whether to follow the federal laws or the state law regarding exclusions of personal property, which may be more favorable.
Under federal law, your retirement savings are generally excluded from your bankruptcy estate as follows:
Employer-sponsored retirement plans and 403 plans) unlimited amount
Employer-sponsored SEP and SIMPLE IRA plans unlimited amount
Traditional and Roth IRAs up to $1,362,800, as of April 1, 2019
Rollover IRAs unlimited amount
Only your IRA assets are subject to an actual dollar limit for bankruptcy protection. This limit applies to all of your traditional and Roth IRAs in aggregate. If you have rollover assets comingled with your IRA contributory assets, and your IRA account balances are approaching the dollar limit, you may need to provide documentation to show how much of your IRA account balances are attributable to employer plan savings.
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Chapter 7 Vs Chapter 13 Bankruptcy
There are two main chapters of bankruptcy used by consumers: Chapter 7 and Chapter 13.
In Chapter 7 bankruptcy, you eliminate most or all of your debt, but in return must turn over nonexempt property to the bankruptcy trustee, who sells it and uses the proceeds to pay your creditors. Any property that is exempt through state or federal law is protected, and cannot be taken by the bankruptcy trustee.
In Chapter 13 bankruptcy, you keep your property and pay off some or all of your debts through a three to five year repayment plan.
There are a variety of other significant differences between Chapter 7 and Chapter 13 bankruptcy, and not everyone is permitted to file for Chapter 7.
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Is An Ira Protected From Bankruptcy
While federal bankruptcy laws have long protected 401 plans, pensions, and similar employer-sponsored, qualified retirement plans, IRAs only came under federal protection with the enactment of BAPCPA. Among a wide variety of bankruptcy reforms, including heightened requirements for filing bankruptcy under Chapter 7, BAPCPA introduced the first explicit federal bankruptcy protections for assets held in IRAs.
Before BAPCPA, IRA protections were defined at the state level, or not at all. After BAPCPA, bankruptcy protection for IRA assets is afforded to citizens in all states.
Protecting Your Home Equity
Your home equity is one of your most important retirement assets, so it’s essential to consider how to protect it if you’re filing for bankruptcy.
Suppose you have $50,000 in credit card debt. If you file a bankruptcy case, the court will typically want you to turn over enough property to pay that debt. Even though you owe $50,000, you may not have to pay that entire amount.
Before you pay the debt, your creditor must file a claim, which must follow certain requirements, or the trustee appointed by the court to administer your case can object to the claim and possibly have it thrown out.
Some creditors won’t bother to file a claim. And any claim that isnt filed or allowed by the court will be discharged. Theres a chance you’ll pay less than $50,000 on the credit card debt.
In some cases, you’ll have to give up your house, which the trustee would then sell to pay off the debt, the trustee’s commission, and all the allowed claims. The court will then refund you anything left over.
Instead of selling your home, you could offer to substitute other nonexempt properties or cash to preserve your house and most of your equity.
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Southern California Bankruptcy Law Firm
Do not let fears about losing your retirement accounts stop you from getting the debt relief you deserve. Count on Resnik Hayes Moradi LLP for trusted bankruptcy assistance. We welcome the chance to meet with you and evaluate your financial situation.
Contact our firm to schedule a free consultation today. We maintain offices in Los Angeles and Sherman Oaks. Payment plans are available.
Our Bankruptcy Attorneys Can Help You Resolve Your 401 Issues
When you are trying to figure out how to navigate issues related to your 401 and bankruptcy, you will need a lawyer with specific experience on bankruptcy in Houston who has the right knowledge and resources to help you. Contact the Law Offices of Kretzer and Volberding P.C. online today to discuss your concerns.
Kansas And Missouri Debtors Can Protect Their Retirement In Bankruptcy
However, stocks, bonds, annuities, and other investment type accounts are not exempt property and can be liquidated for the benefit of your creditors in a chapter 7. There are some exceptions for debtors who need payments from these investment accounts to assist with their necessary expenses due to illness, disability, age, or death.
Bankruptcy exemptions are complicated and vary from state to state to ensure you are receiving the full benefit and protection under the bankruptcy code make sure you have spoken with an experienced Kansas City bankruptcy attorney.
Irasalso Offer Protection From Creditorsbut With Limits
IRAs are protected from creditors by federal bankruptcy law under the following circumstances:
- If the entire IRA balance came from a qualified plan rollover
- For an amount up to $1,362,800 for deductible and Roth IRA contributions and earnings on those contributions this amount doesnt include employer plan rollovers
Inherited IRAsthose received by a client as a beneficiary of an accountare not protected from seizure under federal law, although some states may offer protection.
State laws govern protection from creditors in IRAs, but they vary from state to state. IRA account holders should check with the state in which they reside to learn about specific creditor protections offered by their state.