BAPCPA expands protection of retirement assets

18 Oct BAPCPA expands protection of retirement assets

Increased protection for IRA’s and 401(k) loans is one of the only bright spots in the bankruptcy “reform” act that became effective two years ago. Debtors anywhere now can have up to a million dollars in an IRA that is exempt from claims of creditors.

Mandatory retirement contributions are an allowable deduction for over median income debtors in Chapter 7, and in Chapter 13, amounts needed to repay loans on these retirement assets are a permissible expense as are ongoing contributions.

This represents a huge step forward in the bankruptcy mentality. It has always astonished me that if bankruptcy is rehabilitative, why has the system not encouraged long term saving?

Prior to BAPCPA, even money spent repaying 401(k) loans, often taken out to pay creditors, was considered to be money available to pay creditors going forward, regardless of the adverse tax impact of defaulting on such loans. Now, there is a recognition that providing for future retirement is as much a necessary living expense as housing, food and gas for today.

My most heartfelt argument to clients who are reluctant to file bankruptcy is the need to be responsible for their self sufficiency at retirement. “Think where you would be if the money you now spend making minimum payments on debt you can never pay off went into savings for old age.”

See my earlier post on the eye popping difference if you fund retirement instead of credit card mininum payments.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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