Bankruptcy does not mean that the debtor has to give up all of his/her property. Through exceptions, the debtor can retain a certain quantity of assets safe in bankruptcy proceedings. Each state has its own bankruptcy exemption laws which allow exemption to certain amount of real estate assets of a debtor. Furthermore, federal laws also provide certain set of bankruptcy exemptions. The Bankruptcy Code Chapter 7 and Chapter 13 details the exemption provisions. Exemptions are different in Chapter 7 and Chapter 13 bankruptcy filings. Generally, Chapter 7 aims to determine the extent of relaxation on property rights whereas Chapter 13 helps the debtor to plan the payments extension.
The US Congress modified the bankruptcy laws and regulations in 2005. Under the new bankruptcy enactment, virtually all retirement plans account and pension funds plans are exempt from creditors, if the debtor files for Chapter 7 bankruptcy. Similarly, in Chapter 13 bankruptcy, the debtor’s retirement accounts are exempted.
With a few exceptions, the exemption amounts are endless, so the entire amount of the pension funds are secured. ERISA qualified pension plans such as 401(k)s, 403(b)s, IRAs (Roth, SEP, and SIMPLE), Keoghs, Profit-Sharing Plans, Money Purchase Plans, and Defined-Benefit Plans come under the bankruptcy exemption. However, these exceptions are not absolute in all cases. It limits the exemption in IRAs and Roth IRAs to $1,171,650 per person. However, if a debtor has more volume of fund in his/her pension plans, the bankruptcy court can initiate steps to pay back the creditors. This volume of money is modified every three years to match the increase in living costs.
Although the volume of fund in a debtor’s retirement and pension plans are exempt from creditors, pension advantages that are compensated to the debtor as earnings are not exempted. Moreover, in a Chapter 7 bankruptcy, the bankruptcy court cannot take any pension advantages that are necessary for debtor’s assistance, but it can take amounts over and above the requirements of the debtor’s assistance to pay back his/her creditors. In Section 13 bankruptcy, any kind of pension earnings involved in a debtor’s reimbursement schedule and the exemption provision help to figure out the debtor’s unprotected financial obligations.