As Americans age, they sometimes accumulate substantial assets, such as pension rights, individual retirement accounts (IRAs) and 401(k) pension accounts. They can also accumulate substantial debts, so the question becomes, how are these retirement savings treated in New York bankruptcy? The short answer is, quite charitably.
But first let me establish some important points. One, simply saying a bank account is for retirement will not protect it from the bankruptcy trustee. The laws protecting retirement assets apply to specific types of accounts that debtors must open before they file. Two, it can get confusing, but some accounts are either never considered property of the estate to begin with or are subject to exemptions. That distinction can affect how the accounts are treated.
So, on to the accounts:
- Employer pension plans and union pension plans are not part of the bankruptcy estate because they aren’t the debtor’s property. They belong to the fund or the union. This means they can’t be liquidated to pay the debtor’s debts. The same goes for Employee Retirement Security Income Act (ERISA) plans, government retirement plans, and others. Debtors who have already retired will have to include the payments they receive in their chapter 13 repayment plans.
- IRAs and 401(k) accounts benefit from a whopping $1,245,475 exemption thanks to the 2005 bankruptcy law, but for New Yorkers, the exemption is even more generous: All property held in trust is exempt from bankruptcy, and the Code of Civil Practice and Law Rule 5205(c) defines retirement accounts as trusts. This is quite a large exemption, and when combined with New York’s homestead exemption can make a compelling case for choosing the state’s exemptions over the federal government’s, especially for wealthier debtors.
For the most part, these protections will keep much of debtors’ retirement savings out of bankruptcy. It’s good for older debtors, but crucial to younger ones hoping to continue saving for retirement in the future as well as avoiding paying a tax penalty for an early withdrawal from a retirement account.
Finally, while it’s not money sitting in an account, debtors can still protect much of the income they receive from these accounts once they’ve retired. The federal exemptions allow debtors to exempt as much of their retirement income as is necessary to support themselves and their dependents. In New York, 90 percent of the income from a retirement account can be exempt, but that can be raised to 100 percent if it is necessary to support the debtor and his or her dependents. Social Security payments should be included in bankruptcy schedules but they may not count toward a disposable income estimate in chapter 13, but it’s a rare situation since most people don’t earn income while receiving Social Security payments.
Inheriting one of these accounts is a different matter as the U.S. Supreme Court ruled that a retirement account, namely an IRA, could pass to the bankruptcy estate if it’s inherited by the debtor.
Debtors who have substantial retirement assets and incomes will need an experienced New York bankruptcy lawyer to help them decide which exemptions to use, and to maximize their benefits.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.