is for “IRA” (and 401k’s) in Bankruptcy. How they can help (or hurt) you.
By Christopher C. Carr, Esq. Chester County bankruptcy attorney. Tel: 610-380-7969 Email: firstname.lastname@example.org Web: christopherccarrlaw.com
The 2005 amendments to the U.S. Bankruptcy Code added a broad new category of property that may be excluded from bankruptcy to the extent that such funds are deposited by the debtor in a tax exempt fund. As part of an overall initiative by Congress to expand the bankruptcy protection of tax exempt investment vehicles, one can now exempt up to one million dollars in an IRA account and such amount may be increased “if the interests of justice so require”.
Section 522 (d) 12 of the Bankruptcy Code states, in pertinent part:
For assets in individual retirement accounts described in section 408 or 408A of the Internal Revenue Code of 1986, other than a simplified employee pension under section 408(k) of such Code or a simple retirement account under section 408(p) of such Code, the aggregate value of such assets exempted under this section, without regard to amounts attributable to rollover contributions under section 402(c), 402(e)(6), 403(a)(4), 403(a)(5), and 403(b)(8) of the Internal Revenue Code of 1986, and earnings thereon, shall not exceed $1,000,000 in a case filed by a debtor who is an individual, except that such amount may be increased if the interests of justice so require.
This new provision of the Bankruptcy Code is important for asset protection and planning purposes. An IRA (other than a “sep” pension or “simple” account) can now be used to shelter funds that would otherwise not be exempt under a state or federal exemption and could thus be eligible for distribution to creditors. Such funds would simply be contributed by the debtor (from say a non-qualified savings account or a tax refund) to a qualified plan, up to the annual aggregate limit imposed by law (for 2011: $5,000 if under 50 years of age and $6,000 if over 50), on or before the date of the bankruptcy filing.
It is important to note as well that this protective coverage is afforded not only for money in qualified funds but also to rollovers from a plan so long as the distribution is again deposited into a qualified plan within sixty days. Thus, perhaps as an unintended byproduct of the rollover provisions, individuals can make emergency IRA withdrawals to meet very short term needs but this strategy should only be pursued in situations where the funds withdrawn are certain to again become available before the sixty day deadline (from say an income tax refund or maturing CD). Otherwise, there will be a “double whammy” effect: not only will such withdrawn funds then be taxable income to the debtor (who may possibly be assessed IRS penalties as well) but the shelter from creditors in bankruptcy discussed above would not be available.
We have talked a lot about IRA’s but what about the employer sponsured plans, the 401k? Well there are advantages for the debtor here as well: The law allows you to pay your creditors and still can save for your retirement. In fact, the more you puy into the plan subject to plan limitations, the less you have to pay them.
When you file a Chapter 13 you can reduce income on both schedule I and on the means test by the amount you contribute to qualified retirement plans. In general this means payroll deductions for both 401k contributions and loan payments. Your plan payment can be unacceptably high, if you are in an excess income situation. But if you max out your contribution, this will result in a dollar for dollar reduction in your plan payment. That is, iyou have the opportunity to turn the tables: instead of making a high monthly payment to your unsecured creditors and a correspondingly lower retirement contribution, you are minimizing the amount they receive by providing for the future of you and your family. What could be better than that?
Law Offices of Christopher C. Carr, MBA, P.C., is a quality bankruptcy and debt relief practice, located in Valley Township, west of Coatesville, Pennsylvania, where Attorney Christopher Carr, a Chester County bankruptcy attorney, who has over 30 years if diversified ;egal experience, concentrates on serving the residents of and businesses located within Western Chester County and Eastern Lancaster County, Pennsylvania, including the communities in and around Atglen, Bird in Hand, Caln, Christiana, Coatesville, Downingtown, Eagle, Exton, Fallowfield Gap, Honeybrook, Lancaster, Lincoln University, Modena, New Holland, Parkesburg, Paradise, Ronks, Sadsbury, Thorndale, Valley Township, Wagontown & West Chester, Pennsylvania. If you reside or do business in the area and need assistance with a legal issue, please call Mr. Carr at (610)380-7969 or write him at email@example.com today!
I also provide Mortgage Modification Services.
Other lawyers in the bankruptcy alphabet game:
Omaha and Lincoln, Nebraska Bankruptcy Attorney, Ryan D. Caldwell: I is for involuntary petition too.
New York Bankruptcy Lawyer, Jay S. Fleischman : I is for Income.
Marin County Bankruptcy Attorney, Catherine Eranthe claims I is for Income as well.
Northern California Bankruptcy Lawyer, Cathy Moran: I is for IRS.
Colorado Springs Bankruptcy Attorney Bob Doig: I is for In Forma Pauperis (he speaks Latin).
Big Island Bankruptcy Attorney, Stuart T. Ing: I is for Independent Contractor.
Michigan Bankruptcy Lawyer, Christopher McAvoy:I is for income Tax Refunds.
Los Angeles Bankruptcy Attorney, Mark J. Markus: I is for Insiders.
©Christopher C. Carr, Attorney at Law, 2011, 2012, All Rights Reserved