Retirement Accounts

Are Retirement Accounts Exempt When Filing for Bankruptcy?

When filing for bankruptcy, debtors often ask “what property of mine do I get to keep”? The good news is that in most cases, 100% of a debtor’s property is protected by available bankruptcy exemptions. This will typically include a debtor’s retirement accounts. In this article, we will take a closer look at what is protected and what is not.

Exemption for Retirement Accounts

The bankruptcy code and New York’s bankruptcy exemptions protect IRA, 401(k), a 403(b), and other ERISA-qualified retirement benefits. See 11 U.S.C. §522 and NY CPLR 5202. There is a limit to the amount of money in a debtor’s retirement accounts that can be protected in bankruptcy using the federal bankruptcy exemptions. Presently, that limit is $1,512,350 total per person. This limit applies to all of a debtor’s retirement funds combined. Typically, in most bankruptcy cases, debtors do not have balances near the statutory limit in their retirement accounts, so it is not an issue in most cases. There is no limit listed in the New York bankruptcy exemption for protected retirement accounts.

Withdrawing Funds from Retirement Accounts Prior to Bankruptcy

If a debtor withdraws money out of a retirement account shortly before their filing petition, the bankruptcy trustee assigned to the case may want to know what was done with those funds. If the debtor transfers any of these funds to friends or family to pay them back, the Trustee may seek the return of these funds too as a preference. The funds would then be used to pay the claims of the creditors in the case. If possible, debtors should generally refrain from withdrawing money from a retirement account until after they have completed their bankruptcy unless they are simply using it to pay for necessary living expenses.

Certain Financial Assets are Non-Exempt

There are certain financial assets that are not covered by the retirement accounts bankruptcy exemptions.  For example, bank accounts, brokerage accounts, and non-ERISA stock option plans are not covered by any specific bankruptcy exemptions. While these assets may be used to save for retirement, they do not have the protection given to IRA, 401(k) and 403(b) accounts.

Another asset not specifically covered by bankruptcy exemptions is an inherited IRA account, where the owner is the beneficiary of the prior owner of the account. The Supreme Court addressed this issue in 2014 in the case, Clark v. Rameker. In that case, the Court held that inherited IRA accounts do not qualify as a retirement fund under the U.S. Bankruptcy Code. Although an inherited IRA is an IRA account, it is not intended to be used for retirement. In fact, the owner of an inherited IRA is generally required to take money out of it every year and is not allowed to put additional funds into it. See Clark v. Rameker 573 U.S. 122 (2014)

While these various financial assets are not covered by specific exemptions, if the debtor is using the federal bankruptcy exemption, they can use the wildcard exemption to protect some or all of these assets, depending on their value. This exemption allows a debtor to protect $1,475 plus up to $13,950 of any unused amount of the homestead exemption of any asset. While some debtors may not be able to fully protect these types of assets with this exemption, they will be able to at least retain some of their value post-bankruptcy.

Contact The Law Offices of David I. Pankin, P.C.

At the Law Offices of David I. Pankin, P.C., we have over 25 years of experience helping debtors protect their assets in bankruptcy. If you have any questions regarding bankruptcy or whether your assets would be protected by bankruptcy exemptions, please feel free to contact our offices to arrange a free consultation. We can be reached at 888-529-9600 or by using our easy online contact form.

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