Retirement Plans and Student Loan Issues

When a person thinks of filing for bankruptcy, it is only natural to be concerned about retaining one’s assets.  No one wants to lose the assets they have worked for many years to acquire through a bankruptcy proceeding.

Under the new bankruptcy law of 2005 virtually all retirement account and pension plan funds are exempt from creditors.  11 USC 522 (d)12 permits the debtor to exempt retirement funds to the extent they are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code. These sections include almost all the retirement plans  such as pension plans, profit sharing plans, stock bonus plans, employee annuities, IRAs, Roth IRAs, government deferred compensation plans, plans of tax exempt organizations, and certain trusts.

Generally, filing Chapter 7 bankruptcy or Chapter 13 bankruptcy, allows you to retain your pension and retirement plan funds, with a few limitations. In a Chapter 7 bankruptcy, the bankruptcy court cannot take any retirement benefits that are necessary for your support.   However, it can take amounts over and above what is needed for your support to repay your creditors. In case of Chapter 13 bankruptcy, the retirement income is included in the repayment plan which will help determine what portion of the unsecured debts one must repay.

Mostly, retirement accounts are exempted and untouchable in bankruptcy.  Problems might arise only in the rarest of situations like when the retirement plan is not truly a retirement plan or is improperly funded or created out of a fraudulent sham. Although the funds in your retirement accounts are exempt from creditors, retirement benefits that are paid to you as income are not exempt.  Apart from the federal protections, there are state exemptions which protect retirement funds.

Student loans, on the other hand are difficult to be discharged in bankruptcy.  One has to prove undue hardship to get a discharge in bankruptcy by filing a petition called an adversary proceeding. If you have already initiated the bankruptcy proceeding, but has not requested a determination of undue hardship, you may reopen your bankruptcy case at any time in order to file this proceeding.  It is up to the court to decide whether you meet the “undue hardship” standard or not. Co-signers must also prove undue hardship in order to discharge student loans in bankruptcy. However, this higher standard can be avoided if you can show that your loans are not really “educational loans” as defined by the Bankruptcy Code.

Another option for repaying your student loans is through a chapter 13 bankruptcy plan. In a chapter 13 case, also referred to as ‘reorganization’ you submit a plan to repay your creditors over time, usually from future income.

Federal law 20 USC section 1095a (d) protects student loan proceeds from garnishment.  Student loans, grants or work awards made under Subchapter IV of Title 20, or Part C, Chapter 34, of Title 42, cannot be taken by creditors of the student receiving the assistance.

Normally, a bankruptcy discharge does not affect your ability to get new federal loans and grants. As bankruptcy can remain part of your credit history for ten years, it is advisable to get professional help before starting a bankruptcy proceeding.


Inside Retirement Plans and Student Loan Issues