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How does bankruptcy affect a debtor’s retirement funds?

Those who file for bankruptcy in Florida may be surprised to learn it is possible to keep your pension and retirement funds you have worked so hard for.

 When someone files for bankruptcy, the bankruptcy estate can take the debtor’s nonexempt assets to pay off his or her creditors. What property is exempt will depend on whether the debtor files a chapter 7 or chapter 13 bankruptcy, and the bankruptcy exemptions of the state in which the debtor resides.

Congress overhauled the bankruptcy codes in 2005 under the Employee Retirement Income Security Act (ERISA). Since then, most retirement accounts and pension plan funds have been deemed property that is exempt from creditors during bankruptcy.

 This means that someone who files for either a chapter 7 or chapter 13 bankruptcy can keep these accounts as long as the accounts are ERISA qualified. With a few exceptions, the exemption amounts are unlimited in bankruptcy. Plans that usually meet the exception include:

  • Defined-benefit plans
  • Money purchase plans
  • Profit-sharing plans
  • Keoghs
  • 401(k)s
  • 403(b)s

Limitations for Traditional and Roth IRAs

One of the few limitations to this broad rule are the funds held in both a traditional and a Roth IRA. For these types of accounts, the exemption from creditors is limited to $1,245,475 per person. If the account has more than this amount, the excess will be taken by the bankruptcy court to pay back creditors.

Other Limitation

Usually ERISA retirement funds are safe from creditors during bankruptcy. However, if a debtor withdraws money from the retirement account and purchases other assets, or places the money in a regular bank account prior to the bankruptcy, it will no longer receive the special protections given to retirement funds.

Retirement plans that are fraudulent, or otherwise found not to be legitimate, will also not be protected in bankruptcy.

Life Insurance

In Florida, the cash value of an insurance policy and its annuities are protected from a creditor’s claims. While the Florida resident is alive, the cash value of any insurance policy that he owns on his own life or on another Florida resident is exempt from creditor’s claims. The law does not protect the cash value of a life insurance policy when the insured is someone other than the debtor. This means a wife cannot exempt the cash value of a policy issued on the life on her spouse or child.

Disability Income

Income benefits under any disability insurance policy are also exempt from creditors during a Florida bankruptcy. This exemption also includes disability insurance that covers health, life, and accidents. Additionally, federal law protects Social Security Disability benefits from creditors.

For more information on what assets are exempt from creditors during bankruptcy, contact the Law Office of David Goldman PLLC today.

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