Individual Retirement Accounts
Individual Retirement Accounts are tax-favored investment accounts that are generally divided into two types: contributory IRAs and rollover IRAs. Contributory IRAs are accounts where you continue to deposit funds into your investment account. Rollover IRAs are accounts where you transfer funds from another pension or investment retirement account, such as a 401(k) account or other employer-defined benefit pension plan, for future investment management. No new contributions can be made to a rollover account.
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal statute that provides protection of qualified employee retirement accounts from being raided by employers, forfeited by civil litigation judgments and mismanaged by investment brokers. In the context of bankruptcy, ERISA provides absolute protection for funds invested into a qualified account. Since the funds from rollover IRAs originate from ERISA-qualified accounts, such as a 401(k) or employer pension, your rollover IRA is fully protected from your creditors in bankruptcy. However, contributory IRAs do not receive ERISA protection since the funds are directly invested by you without being channeled through an employer.
Consumer bankruptcy is divided into two formats: Chapter 7, where non-exempt assets are liquidated and paid to your creditors; and Chapter 13, where you are placed on a three- to five-year repayment plan. At the conclusion of either type of bankruptcy, any remaining eligible debts are discharged and your creditors can not pursue you for further payment. In Chapter 7 bankruptcies, the law protects different types of assets from seizure by the court-appointed trustee by exempting it from your bankruptcy. Under Chapter 13, exemptions reduce the amount of money available to pay your creditors each month. IRA accounts are generally considered exempt under both Chapter 7 and Chapter 13 bankruptcy.
2005 Bankruptcy Reform
In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to curb perceived abuses of the bankruptcy process. Under BAPCPA, ERISA-qualified retirement accounts, including rollover IRAs, became wholly protected from creditors in bankruptcy petitions filed after October 17, 2005. BAPCPA also created an exemption of up to $1,000,000 for contributions into contributory IRAs. This exemption only applies to the actual contributions. Rollover funds deposited into a contributory IRA are fully protected, up to an an unlimited amount.