Special rules in bankruptcy, part 2: protecting retirement funds and IRA’s

This is the second in a series of blog articles about some of the special rules that cover certain types of property. Generally those seeking a fresh start in bankruptcy end up having to surrender property that has net value greater than the dollar amounts they can claim as exempt, or else they have to pay that value to a trustee for the benefit of creditors.

Far too often, we see people emptying their pensions, profit sharing plans, or IRA’s to pay creditors. Besides the taxes and tax penalties that can be generated, if this strategy only postpones an inevitable day of reckoning, it is short-sighted and can make it harder for debtors to get back on their feet.

Pensions, profit sharing plans, 403B plans, and other similar retirement plans that are “ERISA qualified” have special protections. These plans and the funds or investments in them are “excluded” from the assets that have to claimed as exempt in a bankruptcy. They still need to be disclosed and properly claimed as excluded, but then they are protected from claims of nearly all creditors and cannot be reached by a bankruptcy trustee. (This same protection also exists outside bankruptcy).

This same protection extends to non-inherited retirement type IRA’s, including those which have been “rolled over” from a qualified pension. 11 U.S.C. 522(d)(12). Recently, one federal appeals court has held that inherited IRA’s, called “IRA-BDA” accounts, do not have this protection, but another court has gone the other way. Stay tuned on this.

This protection is usually lost once money is taken out of an IRA or other protected retirement account. New Jersey has a special rule that protects proceeds of such accounts. But tracing money in an other account back to an IRA or pension can become difficult unless the funds are kept separate.

With proper guidance from experienced and knowledgeable counsel, persons in financial difficulty can obtain the maximum benefit of their right to a fresh start. As always, attention to the details, proper planning and the correct advice makes all the difference. We can help.

Part 1: Protecting Social Security Benefits

Part 3: Tax Refunds

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