Section 522(n) of the bankruptcy code states that “For assets in individual retirement accounts described in section 408 or 408A of the Internal Revenue Code of 1986, other than a simplified employee pension under section 408(k) of such Code or a simple retirement account under section 408(p) of such Code, the aggregate value of such assets exempted under this section, without regard to amounts attributable to rollover contributions under section 402©, 402(e)(6), 403(a)(4), 403(a)(5), and 403(b)(8) of the Internal Revenue Code of 1986, and earnings thereon, shall not exceed $1,095,000 in a case filed by a debtor who is an individual, except that such amount may be increased if the interests of justice so require. So, it’s clear that retirement accounts, specifically, IRA, 401K, 403, including rollovers into these accounts are exempt in bankruptcy up to over a million dollars.

An amount that is substantially in excess of a million could be exempt if the interests of justice so dictates. For example, debtor has one million dollars in his IRA. He owes $300,000 of credit card debt, owns a house with equity of $100,000, and owns a 2010 Lexus 350R which is collateral for a car loan of $42,000. Assuming he qualifies in all other respects for a chapter 7 discharge, what happens to his assets and debts? The discharge order will wipe out $300,000 of credit card debt. Debtor will keep the entire $1.0 million in his IRA, keep his house with $100,000 equity, and keep his Lexus. This is a pretty good deal for debtor. He is able to keep all his assets, including his $1.0 million IRA, while wiping out $300,000 of credit card debt. What is the lesson to be learned here? Never ever liquidate your retirement account to pay for debt, especially credit card debt because you can exempt all of your retirement accounts up to $1.0 million while discharging all of credit card debt. The retarded way of doing bankruptcy is what I have seen many times in the past with clients using up all of their retirement accounts to pay off credit card debt then filing bankruptcy to wipe out credit card debt that have not been paid off. The usual reply is that they would not have raided their retirement accounts if they had known that they could keep their retirement accounts in bankruptcy. I have seen debtors in their fifties and sixties use up all of their IRA and 401K to pay credit card debt and still owe hundreds of thousands in credit card debt, not to mention thousands of dollars owed to the IRS for early liquidation of their retirement accounts.

《楊清泉律師專欄》Inherited retirement account is not exempt in bankruptcy(PART II)