Bankruptcy and Retirement Contributions Rules

• Chapter 7 debtors may be able to keep their retirement contributions.relaxing with great grandma image by Pix by Marti from Fotolia.com
  
  When a bankruptcy court grants a debtor a discharge of his debts in a Chapter 7 bankruptcy case, it does so with the intent of giving the debtor a fresh start. Before filing for bankruptcy, the debtor could not keep up with his debt payments. After having some of those debts wiped out, the debtor should do just fine with keeping up with the debts that are left.
  
  

Policy

• To have a fresh start, debtors need to have a place to live. They need to be able to pay their bills so that they do not end up in the same place they started. They need to work to pay the bills, and most need a motor vehicle to get to work. They need insurance to be seen by a doctor. In a Chapter 7 bankruptcy case, a trustee sells the debtor's property to make money to pay the debtor's creditors. Because debtors need so much to continue living life as usual, the trustee cannot sell the debtor's property and pay creditors at the expense of the debtor's livelihood. For that reason, federal law and state laws have lists of property that debtors can keep in a Chapter 7 case. Most states allow debtors to keep retirement contributions.
  
  

Federal Exemptions

• The federal bankruptcy code allows debtors to keep tax-exempt retirement accounts and IRAs and Roth IRAs up to $1,095,000 per person. This federal law applies to all states, but the code allows states to opt out of this provision of the code. Opting out means that a state's residents can only claim exemptions listed in its own state laws. Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, Pennsylvania, Rhode Island, Texas, Vermont, Washington and Wisconsin have not opted out. Their residents may claim either state or federal exemptions.
  
  

State Exemptions

• Each state has different types of retirement contributions that its debtors can keep. Louisiana debtors keep tax-exempt retirement accounts and IRAs and Roth IRAs up to $1,095,000 per person; Employee Retirement Income Security Act (ERISA)-qualified benefit contributions, if deposited more than one year before filing; gratuitous payments to employee or heirs from employer, whenever paid; pensions of school employees, judges, assessors, court clerks, district attorneys, municipal employees, parochial employees, voting registrars, sheriffs, firefighters, police officers, state employees, teachers and Louisiana University employees.
  
  Nebraska debtors may keep tax-exempt retirement accounts and IRAs and Roth IRAs up to $1,095,000 per person; ERISA-qualified benefits needed for support including IRAs and Roth IRAs; military disability benefits; public employees' deferred compensation; and pensions of county employees, school employees and state employees.
  
  Illinois allows debtors to keep tax-exempt retirement accounts and IRAs and Roth IRAs up to $1,095,000 per person; ERISA-qualified benefits and IRAs; and pensions for general assembly members, police officers, firefighters, municipal employees, county employees, civil service employees, park employees, sanitation district employees, state employees, state university employees, teachers, judges, house of correction employees and disabled firefighters and their widows and children.