Can You Keep Your Retirement Accounts in Bankruptcy?
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Can You Keep Your Retirement Accounts in Bankruptcy?
This is understandably a major concern for many people considering filing for bankruptcy. The good news is that under most circumstances, you can keep your retirement accounts, such as 401ks and IRAs, if you file for bankruptcy. It is important to note that federal law caps the protected amount for some accounts. And, in a few limited situations, your retirement accounts might not be safe from the claims of the bankruptcy trustee and your creditors.
ERISA v. NON-ERISA Qualified Plans
The type of protection the law provides for your retirement account depends on whether it’s an ERISA (Employment Retirement Income Security Act) qualified plan or a non-ERISA plan.
- ERISA-qualified plans. An ERISA plan is established by an employer, meets certain IRS guidelines, and is tax exempt.
- Non-ERISA-qualified plans. The most common type of non-ERISA plans are IRAs (Individual Retirement Accounts).
ERISA-Qualified Retirement Plans
If you have a ERISA-qualified account and file for bankruptcy you have nothing to worry about. You can protect an unlimted amount of money in these accounts. An ERISA-qualified retirement plan isn’t property that’s included in bankruptcy and can’t be liquidated by the bankruptcy trustee appointed to your bankruptcy case. Here are some examples of ERISA-qualified retirement plans include:
- 403(b) or profit sharing plans
- 457(b) deferred compensation plans
- governmental plans, and
- tax-exempt organizational retirement plans.
If you are having financial problems PLEASE try to avoid taking any money out of these accounts to pay your bills because that money is protected from creditors AND if you pull out your money early you will have to pay taxes on that money.
Non-ERISA Qualified plans
Bankruptcy law also protects non-ERISA retirement accounts. Non-ERISA plans include:
- Roth IRA’s
- SEP-IRA’s (for small business owners)
- SIMPLE IRA’s (for self-employed individuals), and
- similar retirement plans.
While ERISA plans have unlimited protection from creditors, the protection for traditional and Roth IRAs is capped at $1,362,800 for cases filed between April 1, 2019, and March 31, 2022. If you have more than one traditional or Roth IRA, you can only protect $1,362,800 combined. The bankruptcy trustee will be able to take any amount over $1,362,800 to repay creditors.
State vs. Federal Bankruptcy Exemptions
The retirement exemptions are part of the federal bankruptcy exemptions. States can “opt-in” and use the federal bankruptcy exemptions or “opt-out” and use their own state exemptions.
However, federal law affords equal treatment of exemption claims of retirement funds to all Chapter 7 and Chapter 13 bankruptcy filers. Therefore, whether you live in an opt-in state or an opt-out state, the federal retirement bankruptcy exemptions apply to your bankruptcy case.
Federal Bankruptcy Exemptions Aren’t Available in Georgia
Some states allow filers to choose between state and federal bankruptcy exemptions. Georgia isn’t one of those states. If you file bankruptcy in Georgia, you must use the Georgia state exemptions. However, you can supplement Georgia’s state exemptions with the federal nonbankruptcy exemptions to protect items such as federal and military retirement accounts and disability benefits.
Georgia Bankruptcy Exemptions Related to Retirement Accounts
Pensions and Retirement Accounts
IRAs and ERISA-qualified benefits – 18-4-22 and 11 U.S.C. § 522(b)(3)(C)
➡️Most people use Ga. Code Ann. § 18-4-22 to cover ira, erisa. For single debtors filing, it has no coverage limit.
Employees of nonprofit corporations – 44-13-100(a)(2.1)(B)
Other pensions necessary for support – 44-13-100(a)(2.1)(C), (a)(2)(E), 18-4-22
➡️Most people use Ga. Code Ann. § 44-13-100 (a)(2.1)(C); Ga. Code Ann. § 44-13-100 (a)(2)(E) to cover reasonably necessary pensions. For single debtors filing, it has no coverage limit.
IRA Payments necessary for support – 44-13-100(a)(2)(F)
Public employees retirement benefits – 44-13-100(a)(2.1)(A), 47-2-332
➡️Most people use Ga. Code Ann. § 47-2-332 to cover state, county, city employees pensions. For single debtors filing, it has no coverage limit.
Inherited IRAs are Not Protected From Creditors
IRA owners have to take additional steps to protect their heirs from creditors after they die.
When an IRA owner dies the account is passed on to their heirs. So what happens if it is inherited by a person who later files for bankruptcy protection? Can this person who inherited the IRA benefit from the IRA bankruptcy exemption? The United States Supreme Court says that, where the beneficiary is a person other than the account owner’s spouse, the answer is “no.”
The Supreme Court held that, after the death of an IRA owner, assets in an inherited IRA for a non-spouse beneficiary no longer constitute retirement funds for bankruptcy purposes; therefore, they are not protected from creditors’ claims when a non-spouse beneficiary files for bankruptcy. (Clark v. Rameker, 134 S.Ct. 2242 (2014).)
IRA beneficiaries in some states are not subject to this decision because these states have established their own bankruptcy exemptions that can differ from the federal exemptions that were the subject of the Supreme Court’s decision. Seven states already have bankruptcy exemptions that exempt all inherited IRAs from creditor’s bankruptcy claims: Arizona, Alaska, North Carolina, Missouri, Florida, Texas, and Ohio.
Our firm is currently representing a client who was a stay at home mom during her marriage. Her divorce granted her a portion of her ex-husband’s retirement account which was then deposited into her own retirement account. The money has sat in this account for year since these funds are what our client will use when she retires.
The Chapter 7 trustee in her case may be filing an objection to her use of the exemption by attempting to use another circuit’s (8th circuit) case ruling which is not binding on our client here in the 11th circuit. The 8th Circuit case involved an ex-spouse’s IRA settlement that he never transferred into his own account and then filed bankruptcy. Our firm will be respresenting our client in the event that the trustee trys to “test case” this case to take her retirement funds from her.
While no action has been taken yet, we expect that the it will and we will update the blog with links to the legal briefs once they are filed. This case just illustrates what we try to always impart to consumers considering bankruptcy: Make sure that you select bankrutpcy lawyers that will fight for your rights and not just roll over when faced with agressive trustee action.
Remember that if the Chapter 7 trustee determines that you have nonexempt property that can be administered in your bankruptcy, he or she will receive a commission based on the amount disbursed to interested parties (such as creditors).
In general, the trustee is compensated on a sliding scale and will receive up to:
- 25% of the first $5,000 distributed
- 10% of any amount between $5,001 and $50,000
- 5% of any amount between $50,001 and $1,000,000, and
- 3% of all amounts in excess of $1,000,000.
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Saedi Law Group are experienced Georgia bankruptcy lawyers who have been helping Georgians file for bankruptcy for over 19 years.
We have filed thousands of bankruptcy cases here in Georgia and are in court every day fighting for our client’s rights against creditors. If you are currently struggling with overwhelming debt, or feel your financial situation will be severely stressed in the coming weeks, now is the best time to start looking at all options available to you.
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It is a privilege to help clients and their families in times like these. Bankruptcy was created for this purpose. Please contact us today at (404) 919-7296 or firstname.lastname@example.org to learn about what you can do to protect your future. #Georgia #bankruptcy #attorneys #chapter13 #chapter7 #financialhelp #Atlanta #Rome #Newnan #Gainesville
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