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How Bankruptcy Affects Your Retirement Account
People who are struggling to pay their bills because of employment problems, medical issues, or other factors are often looking for money anywhere they can find it. When such individuals consider the possibility of filing bankruptcy to help feel some financial relief, there is understandable concern about what might happen to the funds that those people have accumulated in their retirement accounts.
In general, many of these types of accounts are protected by federal law, so individuals can often emerge from Chapter 7 or Chapter 13 bankruptcy with their 401(k) or other retirement accounts intact. If a person attempts to cash in a retirement account or transfer funds in an attempt to pay down debt, that may cause unforeseen problems.
Lawyer in Cincinnati, OH Discusses How Bankruptcy Affects Your 401(k)
Are you concerned about what might happen to your 401(k) or other retirement account if you file for bankruptcy? Hiring experienced legal counsel will ensure that you receive the protection you are seeking. Contact Steiden Law Offices today.
Our Cincinnati bankruptcy attorneys help residents of communities all over Kenton County and Boone County in Northern Kentucky as well as Hamilton County in Southern Ohio. Our lawyers will provide a complete evaluation of your case as soon as you call to receive a free initial consultation.
Overview of How Bankruptcy Affects Your Retirement Account in Northern Kentucky
- Which kinds of retirement accounts are protected in bankruptcy?
- What are some things people should never do with their retirement accounts before filing bankruptcy?
- Where can I find more information about how bankruptcy affects your 401(k) in Cincinnati?
Regardless of whether an individual is filing Chapter 7 or Chapter 13 bankruptcy, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) broadened the protection afforded to retirement plans. Assets held in ERISA-qualified plans are exempted from the bankruptcy estate.
The phrase "ERISA-qualified" is not clearly defined, so plans are considered “tax-qualified” if they meet the rules of Internal Revenue Code (IRC) §401(a). BAPCPA protects retirement funds from bankruptcy creditors to the extent that those funds or accounts are exempt from taxation under IRC §§ 401, 403, 408, 408A, 414, 457, or 501(a).
Common types of tax-deferred retirement plans exempt from bankruptcy estates include, but are not limited to:
- 401(k) plans;
- 403(b) plans;
- Defined benefit pension plans;
- Employee stock ownership plans (ESOPs);
- Individual Retirement Accounts (IRAs);
- Money purchase plans; and
- Profit sharing plans.
Certain limitations can apply to certain kinds of accounts, depending on where a person files bankruptcy. As of 2016, the limit the exemption from creditors for IRAs and Roth IRAs is $1,283,025, and any excess amount can be taken by a bankruptcy court.
Under Ohio Revised Code § 2329.66(A)(10), Simplified Employee Pensions (SEPs) and SIMPLE IRAs are not exempt. Additionally, Kentucky Revised Statute § 427.150(2)(f) provides that an IRA or Roth IRA e exemption does not apply to any amounts contributed to an IRA if the contribution occurred within 120 days before the debtor filed for bankruptcy.
In general, a person's retirement account is usually safest when he or she does not touch it. Problems with such accounts in bankruptcy cases often stem from individuals accessing these funds or attempting to use the accounts.
Three of the most common mistakes people make that you will definitely want to avoid include:
- Cashing in 401(k) — Withdrawing any money from a 401(k) immediately transforms the funds from a protected asset into an unprotected one.
- Using 401(k) to Pay Down Debt — Taking money out of a 401(k) to pay bills not only results in penalties for withdrawing funds early, but also wastes retirement savings on debts that are likely to be discharged in bankruptcy anyway.
- Putting Money Into 401(k) — While many people upon learning that retirement accounts are protected assets believe it would be wise to convert nonexempt assets—such as the funds in a checking or savings account—into exempt assets by making depositing them into a retirement account, a trustee may view such moves as attempts to hinder, delay, or defraud a creditor. As a result, people not only risk losing tax-exempt status, but also possibly not having their bankruptcy discharge granted.
ERISA | United States Department of Labor — On this section of the Department of Labor website, you can learn more about the federal ERISA law. Find information about participant rights, fiduciary responsibilities, and types of retirement plans. You can also learn more about retirement savings, plan information, and compliance assistance.
Patterson v. Shumate, [504 U.S. 753 (1992)] — ERISA contains an anti-alienation clause that provides that retirement plan benefits cannot be assigned or alienated. Courts had been divided as to whether ERISA § 206(d)(1) constituted an enforceable restriction on the transfer of a debtor’s beneficial interest in a plan or trust under applicable nonbankruptcy law that would warrant the protection afforded under the Bankruptcy Code until the United States Supreme Court issued its unanimous decision in this case. The Court concluded, "The antialienation provision required for ERISA qualification and contained in the Plan at issue in this case thus constitutes an enforceable transfer restriction for purposes of § 541(c)(2)'s exclusion of property from the bankruptcy estate."
Steiden Law Offices | Cincinnati Retirement Account Bankruptcy Lawyer
If you are thinking about filing for Chapter 7 or Chapter 13 bankruptcy and have concerns about protecting your 401(k) or other retirement account, you will want to make sure that you have legal representation. Steiden Law Offices can help protect as many of your assets as possible.
Our Cincinnati bankruptcy lawyers assist clients in communities throughout Southern Ohio and Northern Kentucky. Call or submit an online contact form to have our attorneys review your case and answer all of your legal questions during a free, confidential consultation.