Filing for bankruptcy is a big decision. It can also be a confusing one, because there is so much misinformation out there about bankruptcy and what happens after filing for one. Worse, even when the information is not actually wrong, it can ignore important nuances such as that there are several forms of bankruptcy, each of which has different rules and consequences.
Let’s clear away some of the confusion about one topic: the effect of bankruptcy on retirement investments. Some retirement investments are exempt or protected from bankruptcy, according to the American Institute of CPAs. For instance, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 makes certain investments free from the threat of garnishment, liquidation and other attempts to seize the funds. Safe investments might include employer-run individual retirement accounts. Less safe may be Roth IRAs and other private, traditional retirement vehicles. These accounts are only protected up to $1 million. Meanwhile, owner-only plans are not protected.
One area that is less than clear is when a Tennessean inherits funds from someone else’s IRA. It currently appears that whether creditors can reach such assets depends on from whom the funds are inherited. If the funds came from a deceased spouse, they appear to be safe. But if the funds came from someone else, then they likely are not.
Because there is a lot of confusion about bankruptcy (in part because there is a lot of ambiguity in the bankruptcy laws), Tennesseans considering bankruptcy may benefit from discussing the pros and cons of doing so with an experienced bankruptcy attorney.
Source: AICPA, “Protection From Creditors for Retirement Plan Assets,” Richard A. Naegele, Mark P. Altieri and Donald W. McFall Jr., Jan. 1, 2014
