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Retirement fund exemptions available in bankruptcy

The months leading up to the choice to file bankruptcy can be demoralizing and stressful, but Kentucky residents in financial distress often look forward to the benefits of court intervention and a fresh financial start. One of those benefits is asset protection. Rules for protection of assets differ under Chapter 7 and Chapter 13. The family home and transportation are typically protected, but debtors may remain uncertain about the safety of their retirement accounts.

Chapter 7 offers a relatively quick plan to sell off nonexempt assets and satisfy or discharge all unsecured debt, whereas Chapter 13 considers nonexempt assets in determining eligibility and crafting a payment plan. It turns out that retirement accounts in many cases, including IRAs, 401(k)s and even 529 college savings plans, are exempt under federal law. However, some circumstances may result in a full or partial denial of exemption.

Debt owed to the IRS is unlike unsecured credit card debt because the IRS can trump the exempt status of retirement accounts. The law also allows bankruptcy courts to use anything over $1.3 million in IRAs to be used for paying any outstanding debt. In the case of a college savings plan, exempt status depends on the beneficiary and timing of deposits.

The good news is that filing for Chapter 7 or 13 can offer significant protections against collections efforts by creditors. Bankruptcy rules about asset exemptions can be exceedingly complex even when considering only federal law. State laws can further complicate matters for Kentucky residents seeking debt relief. This means that structuring assets and debt is not an intuitive process, and the protections offered by the court are not always obvious. An experienced attorney may help debtors prepare wisely for bankruptcy and receive the best chance at a fresh financial start.

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