The following newsletter was written by Heath Issacs, who is a bankruptcy attorney we have done a lot of work with, from bankruptcy petition drafting, to live bankruptcy seminars.
First a little info about Heath:
Heath began filing consumer bankruptcies in 1996. During his career, he has worked as corporate counsel for Intermountain Health Care, Alltel and CellularOne. He owns MyBankruptcyTeam, which is not only a law firm but a VBA firm as well. His VBA firm services more than 20 law firms outside of Utah and 6 firms in the state.
Retirement Accounts: They are not always property of the estate.
If you're working on a case where the debtor has a large trust or retirement account, you will want to be aware of how to manage the accounts in regards to Schedule B. Many debtors will worry about jeopardizing their retirement money when they file bankruptcy. In several states the exemptions do not cover cash on hand and bank accounts. In these states, attorneys will coach their clients to convert cash into exempt property before filing.
Trustees will often ask if the debtor has a retirement account like an IRA or 401k. They may also ask about trust accounts where the debtor is a beneficiary. Here's how the federal law applies to these assets.
401k's and IRA's
In 1992, the US Supreme Court ruled that ERISA qualified retirement accounts are not property of the bankruptcy estate. Patterson v. Shumate, 504 U.S. 753. What does this mean for you? Technically, you don't need to even mention the account on Schedule B of the bankruptcy petition. However, if a trustee asks and finds out the account exists, he or she will likely become accusatory and suspicious of the remainder of the case, thinking assets have been hidden.
PRACTICE TIP: Many attorneys have adopted the practice of listing a 401k or IRA on Schedule B but including language similar to this:
Pursuant to Patterson v. Shumate, this account is ERISA qualified and is not property of the estate. Disclosure is made in the event of a change in the law.
Then on Schedule C, many practitioners will still claim the state law exemption but add the same language above in the explanation section.
Use Federal Exemption & State Exemption
Many states do not allow the use of the federal exemptions. However, the 2005 changes to the bankruptcy law allow debtors in all states to use the retirement account exemption found in 11 U.S.C. 522(b)(3)(c). Good practitioners will mention the accounts and then use both the state and federal exemptions protecting the entire amount. In re Braulick, 360 B.R. 327.
State Statutes and 12 Month Contributions
In several states, statutes exist that specifically indicate the contributions a debtor makes to a 401k account during the year prior to filing are not exempt and are available to the bankruptcy trustee. For example, a debtor with $40,000 in a 401k may have made $50 contributions from each paycheck during the prior year, adding up to $1,200. In Vermont and Utah these statutes are in place. However, in Vermont the bankruptcy courts ruled that the statute is not enforceable and the money is not available to the trustee. In re Leahy, 370 B.R. 620.
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