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Retirement Accounts Exempt from Bankruptcy
In a usual bankruptcy, creditors are allowed to collect certain “non-exempt” property such as cash, mutual funds, bonds, a second home or car, coins, paintings, and other luxurious items. However, exempt items are things people need to survive, such as: a minimum income, welfare and social security benefits, unemployment and worker’s compensation, veteran’s benefits, child and spousal support, life insurance, certain court judgments, and other necessary items such as transportation, furniture, and clothing.
Among these exempt items are retirement savings accounts. The government and public policy support people saving for their retirement. In a modern society, children may no longer financially support their parents in their old age. Also, by saving their own money, retirees will not cripple the already overburdened social security and Medicare systems.
In general, accounts exempt from income taxes are also protected in bankruptcy. These accounts include IRAs, Roth IRAs, 401(k)s, 403(b)s, and Keogh plans for self-employed individuals.
In 2005, IRAs received even more protection in bankruptcy from both a Supreme Court decision as well as from Congress. The Supreme Court affirmed that an IRA is protected in bankruptcy provided that it is “reasonably necessary for the support of the debtor.” Also, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 created a statutory exemption up to $1 million for retirement accounts, even without a consideration of the filer’s need for the account.
BAPCPA was enacted to reduce the benefits of filing for bankruptcy. However, the act is favorable to bankruptcy in regards to retirement accounts. The explanation may lie in that professionals such as doctors can lock their money away in IRAs and have it rest safer against the prying hands of judgment creditors.
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