Pensions and Chapter 7 Bankruptcy filings

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 from their pension prior to filing for bankruptcy, if necessary.

Under the law, 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 If those monies are withdrawn from a pension plan they are subject to the reach of creditors and therefore if possible a debtor should not borrow from their pension prior to filing for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