Will I Lose My Retirement Account to Creditors in Bankruptcy?
For those considering bankruptcy as a debt relief strategy, a main concern is whether they will lose their retirement account to creditors as part of the process. The short answer is, “it depends.” In many situations, keeping retirement savings is possible, but this is not always the case. Working with the experienced bankruptcy team and specialists at RJS LAW is recommended to help guide you through the process and minimize losses.
What Does Bankruptcy Law Say About Retirement Savings?
Exemption laws in both Federal and California bankruptcy proceedings have been strengthened in the past few years and, in most cases, retirement savings are protected from creditors. Retirement savings are usually not considered part of a “bankruptcy estate” and are therefore out of the reach of creditors.
Under federal bankruptcy law virtually all personal assets are considered part of the “bankruptcy estate,” however, the law does exempt some assets from the proceedings. At the federal level and in California, contributions to most employer-based retirement plans, deferred compensation plans, and tax-deferred annuities are excluded from the estate.
Also excluded are retirement plans set up as trusts, which are commonly used today. Unfortunately, trusts set-up and funded by a single person who retains full control over the trust assets are not included in the exclusion. These trust arrangements would come under intense scrutiny from the bankruptcy courts.
In 2005, bankruptcy laws were reviewed and updated making it more difficult to obtain relief via bankruptcy. Exemptions were more narrowly defined. However, regulations for the protection of retirement and pension funds were expanded.
Exemption amounts are unlimited for most types of “qualified” retirement plans, which makes the full value of the retirement account protected from creditors. “Qualified” plans include most ERISA qualified pension plans, including 401(k)s, 403(b)s, Keoghs, profit sharing plans, stock bonus plans, employee annuities, government deferred compensation plans, money purchase plans, and defined benefit plans.
For Traditional and Roth IRA’s, there is a ceiling limit as to the amount of money exempted. The upper limit is currently $1,171,560 per individual – a number adjusted for inflation every 3-years.
Besides qualified retirement accounts, other protected assets under California law include veterans’ benefits, Social Security, as well as retirement benefits for civil service, foreign service, military service employees, railroad employees and military survivor benefits.
Understanding California’s Use of Federal Bankruptcy Exemptions
With the protection offered by the U.S. government, why would additional layers of California exemptions be useful? In most situations, California’s additional exemptions are indeed redundant. However, in some areas California’s exemptions are broader and can make a real difference to the overall outcome of a bankruptcy.
For example, while funds invested in retirement accounts are usually exempt from bankruptcy proceedings, retirement benefits paid to you as income may not be exempt under federal law. Fortunately, California Code of Civil Procedure Section 704.115 offers protection of retirement income (not just the money in a retirement fund) from the reach of creditors.
The California exemption continues to protect the retirement money once received. This is a critical protection as bankruptcy rules are usually quite stringent with cash balances for those who file.
With the various layers of protection under existing law, in many situations retirement account would be exempt and untouchable to creditors. Bankruptcy courts usually retirement accounts in unusual cases or when the retirement plan appears inappropriate.
None the less, bankruptcy law is quite complicated and could endanger assets, even in normal circumstances where retirement plans were rolled over to qualifying plans or amounts were borrowed against from the retirement plan.
If you are considering bankruptcy, contact the experienced legal team at RJS LAW. We will discuss options on how best to protect the retirement benefits accumulated through your hard work and help you develop a plan best navigate the bankruptcy process. Call today for a no-obligation consultation at (619) 595-1655.