How individual retirement accounts fare under the BAPCPA law

Congress revised the Bankruptcy Code in 2005, and the changes shed light on your concerns.

About the BAPCPA

The revision is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, better known as BAPCPA. As a result of this act, if you are about to file for bankruptcy protection and your net monthly income is more than the median income for your state, you will have to repay a portion of the debt you owe under Chapter 13.

Retirement plan exclusions

The good news is that the assets you hold in qualified plans like your 401(k) and profit sharing plan will be excluded from bankruptcy. There are BAPCPA guidelines for which plans qualify and which do not, and those guidelines include a favorable determination letter from the Internal Revenue Service.

The IRA dollar limit

While the Supreme Court determined that you can exclude an IRA from a bankruptcy filing, the court did not rule on the provision of the federal bankruptcy law that speaks to the dollar amount. The legal system has now addressed that matter. According to BAPCPA, there is protection for up to $1 million in assets held in both Roth and traditional IRAs. Furthermore, you can exclude any funds from a qualified retirement account rolled over into an IRA from the bankruptcy estate altogether.

Protection from creditors

The Employee Retirement Income Security Act also comes into play regarding your retirement accounts. Under Title 1, Section 206(d), ERISA provides qualified plans such as your 401(k) with protection from creditors. Creditors may not levy, garnish or attach the assets you hold in such a plan. The bottom line is that bankruptcy laws can be complicated, but as with the BAPCPA and ERISA, they offer protections that are important to those who are looking ahead to a debt-free life.