If you are thinking of filing for Chapter 13, then you’re bound to have concerns about any investments you may have. Can creditors like the IRS touch them? Which ones are protected? It’s a complicated area that a New York bankruptcy attorney can clarify for you.
The Employee Retirement Income Security Act (ERISA) protects your retirement assets during times of financial difficulty, so your 401(k) retirement plan cannot generally be touched by creditors after you declare bankruptcy.
There is one big exception to this overall protected status: the IRS can claim future payouts to cover tax arrears, even if you aren’t receiving income from your 401(k). For example, if you file for Chapter 13 at age 35, then the IRS may not be able to touch your money until you reach the age of 59 and a half, but they can issue a levy and attach both penalties and interest, which will compound the debt substantially over the next two decades.
This is generally done as a last resort, however, and your attorney can advise you on how to proceed if your 401(k) is at risk of a levy.
Traditional and Roth IRAs
Like 401(k) plans, non-ERISA accounts are protected in bankruptcy, but not 100%. The current IRA exemption is capped at $1,283,025 across all of your IRA assets. Any remainder can be included in the bankruptcy estate. It is also important to remember that if you are withdrawing from IRAs as income, these withdrawals automatically lose their federal protections and can be seized to repay creditors. Avoid withdrawing these funds if you expect to declare bankruptcy.
529 college savings plans
If you gift funds to certain beneficiaries, such as children, stepchildren, and grandchildren, then they no longer legally belong to you and cannot generally be included in a bankruptcy estate. The general rules are as follows:
- All money deposited more than two years before you file is completely exempt.
- Funds gifted between one and two years before bankruptcy is exempt only up to $5,000.
- Anything deposited within 12 months before filing can be seized. This is because many debtors will attempt to avoid repaying debt by dumping money into a child’s 529 savings plan beforehand.
Employee stock purchase plans and profit sharing
Unless the money is qualified under ERISA, employee stock purchase plans (ESPP) and profit sharing proceeds are not protected when you file Chapter 13. Your plan administrator can advise on how the money is categorized.
If you want to file for Chapter 13 but are concerned about any accumulated investments, then see a New York bankruptcy attorney who can advise you on the best way of protecting as many of your assets as possible. Jayson Lutzky is a Bronx bankruptcy attorney who handles personal bankruptcies. If you would like to learn more about what your options are if you are in debt, then call 718-329-9500 to set up a free initial in-person consultation with Mr. Lutzky. Visit mynewyorkcitylawyer.com to learn more.