IRAs and Bankruptcy

When a client walks into the Bay area law offices of Melanie Tavare to discuss debt relief matters, one question that is often at the forefront of the client’s mind is asset protection. The client wants to know whether his or her assets will be protected during a bankruptcy. Often, the client will have worked years to acquire valuable assets and to set him or herself up for a retirement. Along the way, the client fell into debt and is now looking for a way out. While the debt can be crushing, clients want to prevent the debt from interfering with their plans of an enjoyable, lengthy retirement.

The two most common questions with respect to asset protection that clients will ask are whether they will be able to hang onto their house and whether their IRAs will withstand the bankruptcy process. Often, clients are in their late 50s and are looking toward a comfortable retirement. They may be counting on the sale of their houses in the Bay area at skyrocketing prices and on their IRAs to allow for a comfortable retirement. They may be thinking about a reverse mortgage to fund their retirement together with IRA money that they sacrificed when they were younger.

If you are facing this situation, the good news is that you most likely will be able to keep your house and almost certainly will be able to hold on to your IRA.

Chapter 13 Bankruptcy

In contrast to Chapter 7, or “straight” bankruptcy, where a debtor will sell off a number of items to satisfy debt, Chapter 13 employs a different strategy. Chapter 13 is the wage earners bankruptcy wherein a debtor creates a budget and submits it to a bankruptcy judge for approval. Upon approval, a debtor is to live within this budget for three or five years, usually five. Money earned in excess of the budget will go to satisfy debt. After the end of the term and assuming that the debtor complies with the program, the debtor will emerge from bankruptcy with the coveted discharge. In this manner, a debtor will have no issues holding on to his or her house and IRAs.

Chapter 7 Bankruptcy

If a debtor files for bankruptcy protection under Chapter 7, then it will depend. A future article will discuss how to protect one’s house during a Chapter 7 filing.

Regarding protecting IRAs, this matter was clarified when Congress created the Bankruptcy Abuse Prevention Creditor Protection Act of 2005, better known as BAPCPA. BAPCPA was sweeping legislation in Congress and signed by President Bush. BAPCPA created a number of new requirements and tightened the eligibility requirements for consumers to benefit from bankruptcy.

A bright spot for distressed debtors was that BAPCPA clarified how IRAs are protected during a bankruptcy. This means that creditors can not touch an IRA during a bankruptcy. This protection applies to traditional IRAs, Roth IRAs, and rollover IRAs.

Note, however, that the IRAs must be structured properly. Before declaring bankruptcy, it is imperative that the debtor conduct a review of the IRAs to assure that creation was proper.

In debt? Considering bankruptcy? Contact the Bay area debt relief firm of Melanie Tavare.