401(K) AND IRAS NOT PART OF BANKRUPTCY ESTATE; PLAN TREATMENT

Many times, I will sheepishly ask individuals about their 401(K) and 403(B) plans and IRAs in an intake interview.  I am happy when the client has saved much.  Unfortunately, usually that is not the case.  Typically clients raid their retirement plans to save their  houses from foreclosure or to pay harrassing creditors.  We should not do this.  But if the world were perfect, I would not be employed.

For some reason, this information concerning retirement benefits and balances is required to be disclosed on Schedule B of  the bankruptcy petition.  The trustees always ask about retirement assets.  It must be their curiosity.  Section 541 explicitly states that such plans or accounts ARE NOT PART OF THE BANKRUPTCY ESTATE. 

More importantly, Congress in 2005 explicitly allowed debtors in Chapter 13 plan to contribute to their retirements while in bankruptcy.  Recently, we came across an appellate decision from the United States Court of Appeals for the Sixth Circuit (BTW, we are in the Fourth Circuit!) in which the debtor increased her payments to her retirement after filing for bankruptcy under chapter 13.   The Court did not allow this.  The debtor could maintain the contribution level she had prior to the bankruptcy filing, but could not increase her contributions afterwards. 

The Sixth Circuit case suggests, if possible, one should establish a  sustainble retirement contributions prior to filing for bankruptcy under chapter 13.   Bankruptcy takes some planning, and for that reason, one should consult with counsel early in the process.   There are many steps that one make take prior to filing, and these can't be done overnight. 

This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes.  Consult with a lawyer concerning the specific application of the law to your unique circumstances.