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Houston Bankruptcy - Bankruptcy & Retirement Income

Do you have questions about Retirement Income in Bankruptcy?

There are many people in Houston who work their entire life, pay into social security, a pension, 401k or other retirement benefit plan, who encounter unexpected events which cause them to seek Debt Relief under the Bankruptcy Code. Whether it is for medical bills from an unfortunate accident or major illness, a foreclosure proceeding, repossession, or any other unexpected financial event, people in the Houston area and throughout Texas receiving retirement income or who have a retirement savings plan file for Bankruptcy.

Individuals and families receiving retirement income who consider filing for bankruptcy often fear that they will not be allowed to keep their personal property and fear losing their retirement income. Others who have not yet received their retirement but have 401ks, IRAs and other qualified retirement plans fear that if they file for bankruptcy they too will loose their retirement. Whatever type of bankruptcy case they may file, be it a Chapter 7 or Chapter 13, people want to know how bankruptcy will affect their retirement income or retirement savings.

If you are considering bankruptcy and are living on retirement income or have a retirement plan and have questions on how it will be affected in a bankruptcy, Contact the Houston Bankruptcy Attorneys at The Law Offices Of R.J.Atkinson for a free bankruptcy evaluation.

Can you keep your retirement income or retirement plan if you file for bankruptcy?

Although every bankruptcy case has to be evaluated individually, it is safe to say that in most cases retirement income is considered exempt. In other words the Bankruptcy Code allows you, the debtor, to keep your retirement income or retirement plan. The bankruptcy law is very specific as to what type of income is exempt. It must be a “qualified” retirement plan.

So what is a “Qualified” retirement plan?

A qualified retirement plan is one that is established by employers for their employees that meets the requirements of IRS under the Internal Revenue Code Section 401(a) or 403(a) and is eligible for certain tax considerations. The plan can provide for employer contributions, as in a pension, retirement or profit sharing plan, which can include employee contributions. Employers can usually deduct their plan contributions made for or on behalf of their eligible employees on the business's tax return as business expenses.

Public Law 109-8 amended the Bankruptcy Code to exempt most retirement plans organized even those not subject to ERISA (Employee Retirement Income Security Act of 1974 P.L. 93-406 ) and accord them protected status as property that could be claimed as exempt by the debtor under the United States Bankruptcy Code. Even with the most recent changes to the Bankruptcy Law, most retirement plans are exempt. The Bankruptcy Law automatically exempts almost every tax-exempt pension as well as all retirement savings accounts in bankruptcy, even if you are using Texas State Bankruptcy Exemptions. 11 U.S.C. Section 522(a)(3)(C).

This list covers 401(k)s, 403(b)s, profit-sharing and money purchase plans, IRAs (including SEP and SIMPLE plans), as well as defined-benefit plans.

Social Security retirement benefits, ERISA qualified pensions, 401ks, IRAs, certain trusts and other retirement plans must be qualified. In order for a plan to be tax-qualified for contributions to a retirement plan, which includes investment earnings on those contributions to be eligible for deferral of federal income taxes, the plan must comply with the relevant sections of the Internal Revenue Code of 1986. The law protects any pension or retirement fund that qualifies for special tax treatment under several internal revenue sections and subsections 401, 402, 403, 408, 408A.

Most often, a retirement plan is legally classified as either a defined benefit plan or defined contribution plan. When there is a defined benefit plan, the employer pays its retired workers a pension or benefit based on a pre-determined formula, which is often based on the employee’s length of service and their average salary in the years immediately preceding their retirement. Every year, the employer must contribute money to a pension trust in order to fund those retirement benefits that the company’s employees earned that year. A trustee whether it be a company or an individual, or other fiduciary appointed by the employer will determine how best to invest those funds. In a Chapter 7 Bankruptcy context a defined benefit plan is usually exempt and a non-issue. In a Chapter 13 Bankruptcy context, most defined benefit plans do not affect the person filing for bankruptcy since the employer is generally the contributor to the pension fund and thus the debtor’s is not making a contribution from their income other than the length of service of their employment.

When a defined benefit plan “requires” or makes it “mandatory” that the employee contribute some part of their wages to the defined benefit plan it is important to have the Houston Bankruptcy Lawyers at The Law Offices Of R.J.Atkinson review your specific situation. Although your plan may be exempt, the ongoing contribution (however minimal) during the pendency of a Chapter 13 Bankruptcy may be an issue.

In the case of a defined contribution plan, it is similar to a savings account which is maintained by the employer on behalf of their participating employees. The most popular defined contribution plan, is a “401(k)” plan, which is named for a that section of the Internal Revenue Code added by the Revenue Act of 1978 (P.L. 95-600). With a 401(k) plan, an employee can make pre-tax contributions to a retirement account. The employee’s contribution is often matched by the employer in whole or in part up to a certain percent of the employee’s salary.

As with a defined benefit plan, in a Chapter 7 Bankruptcy, your defined contribution plan is usually exempt and a non-issue. However, in a Chapter 13 Bankruptcy context, your voluntary contribution to the plan may be stopped during the pendency of the Chapter 13 plan since making a contribution from your income or wages would be taking away money that would be available to repay creditors. If your employer “requires” or makes it “mandatory” to participate in the defined contribution plan then you may be able to contribute while in your Chapter 13 repayment plan, but you should have an Houston Bankruptcy Attorneys at The Law Offices Of R.J.Atkinson review your particular circumstances as most defined contribution plans are voluntary.

Texas Retirement Exemptions

The following are the applicable Federal & Texas State exemptions pertaining to retirement income:

  • Teachers
    Texas Government. Code Annotated. § 821.005
  • Texas County and District employees
    Texas Government Code Annotated. § 811.006
  • ERISA- (Employee Retirement Income Security Act) qualified government or church benefits, inclusive of Keoghs & IRAs; (except for Roth IRAs, IRAs limited to tax-deductible contributions)
    Texas Property Code Annotated. § 42.001
  • Firefighters
    Texas Civil Statutes Annotated Article. 6243e.1 (1.04)
    Texas Civil Statutes Annotated Article. 6243e (5)
    Texas Civil Statutes Annotated Article. 6243b (15)
    Texas Civil Statutes Annotated Article. 6243a-1 (8.03)
    Texas Civil Statutes Annotated Article. 6243e (5)
  • Law enforcement officers, firefighters, emergency medical personnel survivors
    Texas Government Code Annotated. § 615.005
  • Municipal employees & elected officials, state employees
    Texas Government Code Annotated. § 811.005
    Texas Civil Statutes Annotated Article. 6243h (22)
  • Police officers
    Texas Civil Statutes Annotated Article. 6243d-1 (17)
    Texas Civil Statutes Annotated Article. 6243b (15)
    Texas Civil Statutes Annotated Article. 6243a-1 (8.03)
    Texas Civil Statutes Annotated Article. 6243j (20)
  • Judges
    Texas Government Code Annotated. § 831.004
  • Retirement benefits to extent tax-deferred
    Texas Property Code Annotated § 42.021

Federal Retirement Exemptions

  • Retirement Exemptions: All types of retirement funds and accounts that tax-exempt under IRC section 401, 403, 408, 408A, 414, 457, or 501(a) ; IRAs & Roth IRAs are limited to $1,095,000.00 (excluding rollover contributions); the limitation can be overridden by judge.
    11 U.S.C. § 522 (d)(12)
    11 U.S.C. § 522 (n)

Social Security retirement income is also exempt in bankruptcy. Many people in Texas living on Social Security who file for bankruptcy are concerned that their creditors can take their Social Security income if they file bankruptcy. Social Security benefits are exempt under 11 U.S.C. § 522 (d)(10)(A). Since Federal Law provides that Social Security benefits are exempt from garnishment, levies, or assignments by most creditors, it is likewise exempt from the trustee in bankruptcy. Now although Federal Law exempts Social Security retirement income in bankruptcy, there are instances where certain taxes, student loans, or debt to Federal agencies may attach to Social Security retirement income.

As with Social Security retirement income, Veterans retirement income benefits are exempt under 11 U.S.C. § 522 (d)(10)(A).

Bankruptcy can offer many benefits when facing financial crisis such as foreclosure, repossession, or loss of property due to a temporary set back. The Bankruptcy Laws were designed to help honest debtor’s who need debt relief and a fresh financial start. If you are receiving retirement income or have a retirement plan and need to file bankruptcy, you should seek competent legal advice.

If you live in Houston, Katy, Pasadena, Pearland, Channelview, Missouri City, or in the Houston area, or in the Counties of Harris, Fort bend, Montgomery, Brazoria, or Galveston, and are receiving retirement income or have a retirement plan and need to file bankruptcy, contact The Law Offices Of R.J.Atkinson. Our experienced Houston Bankruptcy Attorneys can explain how your retirement income or retirement plan would be treated in a bankruptcy filing at a free bankruptcy evaluation.

Questions about bankruptcy, retirement income, 401k, Social Security, IRA, or pensions?

Contact Houston Bankruptcy Lawyer R.J.Atkinson at 713-862-1700

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