{"id":3884,"date":"2017-11-13T07:00:53","date_gmt":"2017-11-13T12:00:53","guid":{"rendered":"https:\/\/nybankruptcy.net\/main\/?p=3884"},"modified":"2018-08-28T08:24:40","modified_gmt":"2018-08-28T08:24:40","slug":"increasing-retirement-contributions-ira-401k-bankruptcy","status":"publish","type":"post","link":"https:\/\/nybankruptcy.net\/main\/increasing-retirement-contributions-ira-401k-bankruptcy\/","title":{"rendered":"Increasing Retirement Contributions (IRA, 401(k)) Before Bankruptcy"},"content":{"rendered":"

Many working debtors have retirement accounts, chiefly investment retirement accounts (IRAs) or 401(k) accounts through their employers. These accounts are assets, but New York bankruptcy exemption rules shield them completely while the federal exemptions protect them up to an enormous amount\u2014more than $1.2 million. Debtors sometimes ask whether retirement contributions are allowed in bankruptcy<\/a>, but clever debtors might also want to know whether they can increase the amounts they contribute before filing. Why not place money in an account that’s already protected?<\/p>\n

Debtors considering this course of action might be concerned that trustees will look at their unusual pre-bankruptcy contributions as evidence of some kind of preference or fraudulent conveyance that they will avoid. The Bankruptcy Code looks down on debtors who try to pay some creditors over others before bankruptcy or dispose of assets that they can reclaim after bankruptcy, like selling a house for a fraction of its market value.<\/p>\n

The case of the increased retirement contributions pre-bankruptcy is clearly not a preference as no other creditor is involved, and there’s no fraud because the cash asset’s value is not being shifted from the debtor’s possession. Investing in retirement is certainly not a pre-bankruptcy luxury purchase that can be avoided. In theory, debtors can argue that they are reasonably using the law to the best of their advantage, similar to timing the means test<\/a>.<\/p>\n

For debtors filing in chapter 7, the issue really rests on whether section 707(a) of the Bankruptcy Code authorizes bankruptcy courts to dismiss cases for prepetition bad faith without regard to the means test. In fact, the federal circuits are split on the subject, and while New York’s Second Circuit has apparently not decided for itself, lower bankruptcy courts have gone in both directions. One interesting argument against a case’s dismissal noted that the examples of bad faith that section 707(a) listed all occur after the filing, which implies that prepetition retirement contributions are not bad faith.<\/p>\n

Even if a bankruptcy court were inclined to consider increased contributions as evidence of bad faith, that doesn’t mean it would do so in all cases. The reasonableness of the amount of the debtor’s income dedicated to retirement is the issue. If a debtor raised his or her voluntary 401(k) contributions from 3 percent to 15 percent, that may be reasonable; 3 percent to 60 percent, probably not. Thus, a chapter 7 debtor could probably consider increasing retirement contributions as another way to use an exemption to soak up excess cash<\/a>.<\/p>\n

New York bankruptcy trustees usually do not allow chapter 7 debtors to deduct their retirement contributions if they are taking the means test. However, if the amount is not too high and would not make a significant distribution to the creditors, trustees might overlook it. The reasonableness of the contributions is important.<\/p>\n

For chapter 13 debtors, the situation is a bit more subtle because debtors intend to pay their creditors out of their future incomes, so past contributions shouldn’t materially make a difference. Debtors can increase their contributions before bankruptcy with an eye towards ensuring that they can negotiate to keep some of the elevated contribution rate during the plan. For instance, a debtor contributing 0 percent of his or her salary to a 401(k) will have a harder time trying to confirm a plan that includes a 5 percent contribution than a debtor who has already set a 15 percent contribution rate. Again, in New York, the reasonableness is what\u2019s important.<\/p>\n

Where debtors will run afoul of a trustee is not before bankruptcy but after the case is closed: The situation would be where the debtor withdraws money out of the retirement accounts (not a normal distribution) after bankruptcy, whether there are any penalties or not. The trustee might reopen the case, confiscate the money, and then revoke the discharge on account of fraud.<\/p>\n

The bankruptcy exemption for retirement accounts offers a tempting opportunity for shifting away nonexempt cash, but it’s risky under current New York bankruptcy law. If you have retirement accounts and you’ve encountered financial difficulties, then consulting with an experienced New York bankruptcy lawyer can help you strategize your options.<\/p>\n

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 Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.<\/p>\n

Rosenberg, Musso & Weiner, L.L.P<\/strong>
\n26 Court St # 2211<\/strong>
\nBrooklyn, NY 11242, USA<\/strong>
\n718-855-6840<\/strong>
\nhttp:\/\/nybankruptcy.net\/<\/a><\/strong>
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