With the increase in bankruptcy filings, many clients have contacted us regarding the treatment of their pensions in a chapter 7 bankruptcy filing and whether they should borrow money from their pension prior to filing for bankruptcy.
Under the law in New York both Roth and traditional IRA’s are exempt up to $1,283,025 in a chapter 7 bankruptcy filing.
401(k)s, 403(b)s, profit sharing plans, SEP & Defined Benefit Plans are completely exempt in a chapter 7 bankruptcy.
Pension monies are also exempt from the reach of creditors (“spendthrift trust”) so they cannot be liened or levied by creditors. If those monies are withdrawn from a pension plan they are subject to the reach of creditors and therefore if possible a debtor should not borrow from their pension prior to filing for bankruptcy.
Additionally, if a person borrows money from a pension (prior to the age requiring a mandatory withdrawal from the pension plan) they will have to report that money as additional income and pay a 10% excise tax on those monies.
Anyone with questions regarding personal bankruptcy should contact Jim Shenwick at jshenwick@gmail.com
jshenwick@gmail.com • Shenwick & Associates
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