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Investment exemptions in bankruptcy

On Behalf of | Jul 31, 2017 | Chapter 13 Bankruptcy

When a Texas resident files for bankruptcy, it can be a scary and uncertain time. How a bankruptcy affects a person’s life and assets depends heavily on the type of bankruptcy they file. While there are many questions a person should ask before choosing a bankruptcy type, one important question is what happens to investments.

Both types of bankruptcy have certain asset exemptions, meaning certain assets cannot be included in the bankruptcy or they are included only under certain circumstances. Many types of investments, fall into this protected category, but there are plenty of nuances to consider.

Some of the biggest investments for most Americans are retirement accounts, pensions and college savings plans. Traditional 401(k) plans are completely protected from creditors during bankruptcy as long as the money isn’t being withdrawn or disbursed. The big exception is tax liability. While it’s true the IRS can’t collect any money until disbursements begin, they can levy any back-owed amount at that time. They are also free to add interest on top of that amount, potentially increasing it dramatically by the time collection begins.

Other types of retirement accounts are protected only up to certain dollar amounts. The same is true of college savings plans, but with an extra caveat; only money deposited two or more years prior is completely exempt and only if the beneficiary is a child or grandchild. If the money is deposited too close to the bankruptcy date, some of it may be taken. Deposits within 12 months of bankruptcy aren’t protected at all.

A person with retirement accounts will want to do everything legally possible to protect their assets from bankruptcy and understand how the Chapter 13 bankruptcy process will affect them. An attorney may be able to answer these questions and help a client figure out a bankruptcy plan.