Anyone facing being taken to court over debt is already suffering from stress over their current financial situation. The last thing they need is to worry about the retirement funds they worked so hard for. This can make filing for bankruptcy a good option because it gives broad protections to retirement plans, such as your IRA, from creditors.
Retirement plans do get some protection from creditors against judgments. The Employee Retirement Income Security Act specifically covers certain benefit plans such as 401(k)s and pension plans. These are called ERISA plans.
In California, these non-ERISA plans include:
- Roth IRAs
- SIMPLE IRAs
You have a good chance of having one of these through your work. SIMPLEs and SEPs were made to be easy for employers to use and administer, and SIMPLE IRAs are employer matching programs. IRAs and Roth IRAs you set up and contribute on your own, and you can contribute to it tax-free. The difference is that you can make qualified withdrawals tax-free from Roth IRAs before retirement.
Retirement Plans Protected From Judgments
Retirement accounts from previous employers get some special treatment. The important things to remember are:
- These are traditional or Roth IRAs that were funded taking money from a qualified retirement fund and putting it in the Rollover IRA.
- The assets in these accounts are completely shielded from bankruptcy proceedings if the original source is a qualified retirement plan.
- Qualified retirement plans to fund your rollover IRA with include standard 401(k)s, some profit-sharing plans, and traditional pension plans.
Funds Necessary For Support
In California, you can also make the argument that you need some funds in your IRA to support you and your dependents when you retire. This has to be judged on a case by case basis and only applies to the amount that is necessary.
California courts will take into whether you need the money now and if you will be able to build the retirement fund back up again before you retire. Whether or not you will be judged capable of replenishing your IRA will depend on your circumstances. They will take into account your present and future income, age, health, special needs of you and your dependents, future living expenses, and ability to work.
Bankruptcy Procedures To The Rescue?
In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act defined IRAs and explicitly protected certain types in certain circumstances. According to this law, not only are ERISA-qualified benefits mostly shielded from creditors, but most of your IRA, SIMPLE, SEP, and Roth IRA are too. (Don't worry, the Roll-over IRA is doubly safe.)
There is an exception with the IRAs and Roth IRAs though: it shields up to only a certain amount. The original amount that the law protected in the IRA's was 1 million dollars per person, but that amount gets adjusted for inflation every three years according to 11 U.S. section Code 522.
The current amount that a bankruptcy court can't touch as of April 2019 if it is in an IRA is $1,362,800 per person. Creditors can get anything over this amount, and any monthly payment you get from the retirement fund will count towards your income in a Chapter 7 means test.
No one facing bankruptcy needs to assume that their future plans are scrapped. Many types of retirement funds are safe from creditors in a bankruptcy filing. You can file for bankruptcy and retire comfortably provided you have the right types of plans.
Fortunately, the Law Offices of James C. Shields has a lot of experience with helping clients through the bankruptcy process. We offer payment plans and free consultations, and we specialize in probate law. Anyone wanting a professional hand in navigating these procedures should contact us.