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Are retirement accounts always exempt from the Trustee?

When an individual files for bankruptcy, he or she is allowed to keep certain personal property without the bankruptcy trustee being able to liquidate that property and pay off creditors with the proceeds.  The idea behind this is that bankruptcy is meant to be a way to rebuild your credit and obtain a fresh start on your finances, rather then simply a punishment for not being able to repay all of your debts.  In order to achieve this goal, a Debtor (the person filing for bankruptcy) is allowed to keep certain things to help reestablish themselves such as equity in your home and vehicle, household goods, clothing, etc.  In addition to these life necessities, a Debtor is generally allowed to keep the money that they have put away and saved for retirement so long as that money is kept in a qualified retirement plan, such as an IRA, 401K, pension or other such ERISA protected account, pursuant to 11 U.S.C §522(D)(10) and 11 U.S.C. §522(b)(3)(C).

Just like if there was no bankruptcy in place, your creditors would have no right to go after any money held in an ERISA protected account even if they had a judgment against you, in a bankruptcy, the Trustee who stands in the shoes of your creditors can not pierce the protection provided by the tax code, and no state law can over ride the Federal exemption relative to ERISA accounts.  In fact the statute is so powerful that even the IRS or your state department of revenue can not force a liquidation of a protected retirement account even to pay a tax lien.

There is one major exception to the protection of a qualified retirement plan though and that is if Debtors promised his or her retirement account against specific indebtedness, when the specific account is promised against an anticipated debt, thereby creating a secured relationship between the account and a debt.  Recently the bankruptcy Court heard a case on point with this issue, In re Daley, and held that the promise against future debt made the ERISA account non-exemptable.  However, both the bankruptcy Court and the Tax Court have held that simply promising the account as security against a future debt is not enough, and that there must be an actual debt the account is promised to cure in order to loose its tax exempt and bankruptcy exempt status.

Cannot Pay Debts Because You Are Waiting on Social Security Disability Benefits To Be Approved

It is tough enough to deal with your injuries that you suffer from daily, let alone deal with collection agencies that continue to remind you that you cannot pay your bills due to your medical condition.  So, what should you do?

Dealing with an mental or physical disability that qualifies you for social security benefits is life altering.  What does it mean? It means that your life as you knew it before will never be the same.  You may have to deal with daily pain and the reality that you physically will not be able to do things that you could before your injury.  That is the physical change you have to deal with; however, there is the financial restrictions you will need to get use to also.  Your financial ability to make money is now minimized and no longer likely to increase unless social security provides you with a raise.

There are two ways of dealing with your debt while you wait for Social Security Disability Benefits:

1. Workout Debt

You can call your creditors and inform them of your condition.  Many creditors provide programs that allow a forbearance of payments if you are dealing with an injury.  You can try to maximize these opportunities so to buy as much time as you can for your benefits might take up to a year to begin to receive.

If these forbearances are not available to you, contact the creditors but this time the conversation might be about trying to settle the debts for less than you owe.  This call probably is best to be made once you know what the amount of your benefits will be.

2. Bankruptcy

The reality is that bankruptcy might be your best option.  It is hard to face the fact that your physical being is never going to be the same which causes your financial health to be damaged.  You worked so hard in your life and did all the right things with your credit by paying your bills.  It does not seem fair.  However, bankruptcy should be looked upon as another Federal program like Social Security Administration to help people like you in this type of situation.

It is likely you would consider filing a Chapter 7 bankruptcy case if you are not receiving any income at this time or receiving the last of worker’s compensation or temporarily disability insurance.  Your income level is most likely qualify you for a Chapter 7 case.  This is a very good thing because you can receive a discharge of all your debts with one process.

You will get a clean slate and be able to start your new life with disability benefits as well as a new financial life.  Yes, debt issues do effect negatively on your credit report but a bankruptcy case, it stops the negative reporting and allows you to begin working on positive reporting again.  There are myths that debt consolidation companies and modification companies tell people such as you will never get a credit card again or a car loan—these are all untrue.

Like your physical injuries, your financial health will take time to heal but unlike your physical condition, your financial health will get better over time with a bankruptcy case.

We know firsthand from past clients on how hard it is for people living in this between state of your former life and your new life.  Some of our clients waited until they got their benefits to deal with their debt and some began the process while they waited for their benefits in order to ensure they could pay what was important with their limited income such as the mortgage payment or car payments.

We recommend whatever makes you feel right.  However, we wrote this blog so that you can know of some ways to deal with your circumstances and that you do have power to deal with your circumstances.  More importantly, in time, you will be alright even if you are not the same as you were before—maybe even better.