Can I Keep A Retirement Account in Bankruptcy?

Can I Keep A Retirement Account in Bankruptcy? Generally, YES.

keep a retirement account in bankruptcy
  You can generally keep a retirement account in Chapter 7 bankruptcy safe from liquidation by the Chapter 7 Trustee, so long as the retirement account or retirement plan meets the definition of a "qualified retirement account" under the IRS Code. In a Chapter 13 bankruptcy, no property is ever liquidated, but non-exempt (non-protected) property can affect the amount of the monthly Chapter 13 plan payment that you make while in the Chapter 13 bankruptcy, regardless of whether the non-exempt property is a retirement account or a Harley-Davidson motorcycle.

Keep A Retirement Account in Bankruptcy: Chapter 7 Bankruptcy

In a Chapter 7 in Michigan, you keep a retirement account in bankruptcy "safe" the same way that all personal property is protected in Chapter 7: by applying so-called "exemptions" to the property in the bankruptcy petition itself. So what does that mean? A Chapter 7 bankruptcy is a "liquidation" bankruptcy. That is, in a Chapter 7 you "liquidate" or fully discharge 100% of all of your dischargeable debts (some debts are not dischargeable, such as recent tax debts, child support payment deficiencies, most student loans, and others) without any need to repay any of it to your creditors. They may never pursue you for collections after your Chapter 7 is filed and discharged. There will be no interest paid to your creditors. You will suffer no taxable liability from the discharge a debt, unlike the 1099 you generally will receive for the "forgiven" balance when you directly negotiate a settlement with one of your creditors outside bankruptcy that you must then pay taxes on as if it were income that you'd earned in that year. However, a Chapter 7 bankruptcy is a "liquidation" bankruptcy also because, in exchange for the complete forgiveness of your dischargeable debts (most debts are dischargeable), the Bankruptcy Code, which is the law governing the bankruptcy process in the United States, allows you only to retain so much personal property through the process. If you have "too much stuff," an individual who is assigned to your case upon filing called the Chapter 7 Trustee has the power (and the duty) to seize your "excess" property and liquidate it. That is, to sell it off and give the proceeds to your creditors, who otherwise are to receive nothing back in repayment of the debts that you owe them. (After the Trustee and his or her attorneys and appraisers and auctioneers, etc., keep a large portion of the proceeds for themselves, naturally.) The Chapter 7 Trustee is able to do this because he or she is a "trustee" over the "bankruptcy estate," which is a legal "estate" containing all of your property, no matter where on Earth it is located and regardless of whether or not you disclose it (you must disclose all of it!), that is created by automatic function of law per the US Bankruptcy Code instantly upon the filing of your bankruptcy petition. This is not too terribly different than a probate "estate" that comes into being by automatic legal function under Michigan state law the moment someone in Michigan passes away without leaving a proper will. In such a case, Michigan probate court system steps in to "administer" the probate estate, which means determining who among the deceased person's legal beneficiaries (per Michigan state law) are to receive what of their possessions. In the Chapter 7 bankruptcy case, the Chapter 7 Trustee is assigned the job of determining which of the assets, if any, are available to administer, or liquidate, for the benefit of your creditors. Most Chapter 7 bankruptcies (90% or more at last count in the Eastern District of Michigan) do not result, however, in any property being liquidated. This is because the Bankruptcy Code provides these "exemptions." The exemptions are what protects your property in Chapter 7 bankruptcy. Their full, accumulated value in dollar-terms is the value of the amount of stuff you are allowed to keep through a Chapter 7 bankruptcy. The exemptions are bits of language from the Bankruptcy Code statute that, in essence, allow you to keep a certain dollar-value limit of certain types of property. Michigan also has its own set of exemptions that may be used instead of the Federal exemptions if desired (not both). For example, under the Federal exemptions, about $3400 (rounding off) worth of equity value in an automobile may be exempted. If you own a car in full with no lien on it that is worth $3,000, it will be fully protected. The exemptions remove the exempted property from the bankruptcy estate. (If the property is not in the bankruptcy estate, the Chapter 7 Trustee has no power to liquidate it.) You can keep a retirement account in bankruptcy in a Chapter 7 context, generally, because the exemption applicable to retirement accounts that are "qualified accounts" under the definition of the IRS Code, which includes most 401(k)s, 403(b)s, IRAs, and other such instruments has no dollar-value cap. You can keep a retirement account up to nearly $1 million safe in a Chapter 7 (after about that point, there are some issues). Other areas of Federal hold that ERISA-qualified plans are not reachable by creditors at all---and thus do not even enter the bankruptcy estate to begin with. But the retirement account must be a "qualified" account. And some sorts of IRAs, such as those that have been rolled-over from non-qualified annuities or those that have been inherited, can be problematic. An experienced Michigan bankruptcy attorney should be consulted before filing any Chapter 7 bankruptcy, period, but especially if you have any appreciable amount of money in a retirement plan whatsoever. Once you file a Chapter 7 bankruptcy, there is no absolute right to dismiss it, and the Chapter 7 Trustee's powers are wide in scope, very broad---and very tough. The Chapter 7 Trustee will liquidate your "retirement account" mercilessly if it turns out that what you thought was a 401(k) was some sort of non-qualified annuity. The documentation that defines exactly what sort of plan it is that you really have is one of the most important pieces of information you will need to provide to your bankruptcy attorney before your petition is drafted and filed if you value the retention of your retirement savings.

Keep A Retirement Account in Bankruptcy: Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, there is no question that you can keep a retirement account in bankruptcy. In a Chapter 13 "payment plan" or "reorganization" bankruptcy, there is no liquidation of assets whatsoever. If you have property that is not exempt (meaning that its value outstrips the value of the exemption available or there is no exemption available to protect that type of property at all), no one will take the property from you. Thus, if there is any uncertainty about whether some property you value is going to be safe in a Chapter 7 bankruptcy, a Chapter 13 bankruptcy is probably the best course of action for you, despite the fact that you will have to make a monthly plan payment. The value of that non-exempt property, whether a retirement account or something else, can have, instead of being liquidated, an impact upon the size of your monthly Chapter 13 plan payment. Ordinarily in a Chapter 13 bankruptcy, if your household income is below the median in Michigan for a household of your size, you will pay monthly into your Chapter 13 only whatever is left over out of your take-home pay after all of your necessary household expenses are deducted. Thus, if your household takes home $2,000 each month after taxes, etc., and you have $1800 in expenses (not including debts included in the Chapter 13 for partial repayment and discharge), you will pay $200 each month to the Chapter 13 Trustee, whose job is not to liquidate your assets but to receive your payment and distribute it out to your creditors in a priority order based on the type of debts you have mandated by the US Bankruptcy Code. If you have non-exempt property, the value of that non-exempt portion must be paid to your unsecured (credit card, medical debt, personal loans, etc.) creditors. The rule is that the unsecured creditors, who get paid last in your Chapter 13 bankruptcy payment priority, can't get less out of your Chapter 13 bankruptcy than they would have received if you'd filed Chapter 7 bankruptcy and had property liquidated by the Chapter 7 Trustee. For example, if you have a diamond ring worth $10,000 and, in a Chapter 7, only $5,000 could be exempted/protected, a Chapter 7 Trustee, in a Chapter 7, would take the ring, sell it off, give you back the $5,000 you could exempt, and distribute the other $5,000 to your creditors (after his or her fees, naturally). In a Chapter 13 bankruptcy, no one will take the ring from you. But, at the end of the 3-5-year Chapter 13 payment plan, there must be at least $5,000 left sitting there in the Chapter 13 Trustee's account for you for your unsecured creditors for your plan to be approved by the Bankruptcy Court. Likewise with a retirement account. A retirement account, qualified or non-qualified, can be a financial instrument of very high value. It is easy to repay $5,000 over 3-5 years as in the diamond ring example, but, if you have a non-qualified annuity serving as a retirement plan that has $50,000 in it, none of which might be exempted, this can be a different mathematical proposition entirely, and a non-bankruptcy solution might be the best course of action.

Keep A Retirement Account in Bankruptcy: The Bottom-Line

In any case, no bankruptcy should be attempted without the counsel of an experienced bankruptcy attorney such as those of The Hilla Law Firm, PLLC. A Chapter 13 bankruptcy, in our opinion and in an opinion expressed by one of our local Detroit bankruptcy judges to a "pro se" (no lawyer) debtor in Chapter 13 bankruptcy, a Chapter 13 is next to impossible to successfully complete without adequate and knowledgeable legal representation. Further, new case-law on this subject from courts elsewhere in the US makes this a further troublesome area. Contractual language in what looks like a very "qualified" 401(k) or IRA can be found to be deficient, making a formerly protected retirement account reachable by a Chapter 7 Trustee. If your employer isn't doing things "right," it can endanger your retirement savings. It is thus ever more essential to have qualified legal representation in bankruptcy, and, as always, vital that you provide your bankruptcy attorney all of the documentation that he or she requires from you. Put the work in to your own case that is requested of you by the attorney you hire to represent you. It is for your own good. If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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