You’ve probably heard that when you file bankruptcy, you have to disclose all of your assets, including retirement accounts and investment accounts. This is true. And it is also true that the Chapter 7 Trustee has the power to seize your assets, including investment accounts. But did you know there are ways to file Chapter 7 and keep your investments?
There are, and whether you can keep your investments will depend upon what types of investment accounts you have, how much is in those accounts and the law in your state. This information comes from the office of a noted Philadelphia bankruptcy attorney.
Using State or Federal Exemptions to Keep Your Investments
When someone files a Chapter 7 bankruptcy case, all of their assets belong in their “bankruptcy estate.” The Chapter 7 Trustee has the power to seize assets in the bankruptcy estate and sell them or liquidate them for the benefit of the debtor’s creditors. But before the debtor even files their case, their attorney will have applied for either state or federal “exemptions” to exempt the debtor’s assets from the estate and included those exemptions in the debtor’s initial filing.
Bankruptcy was not meant to leave a debtor with anything. How could a debtor get a “fresh start” if they have to start over with nothing? State and federal exemptions were created to make sure debtors could keep certain assets up to a limit.
Investments in stocks, index traded funds, mutual funds, and other publicly-traded assets must be exempted from your estate before you file bankruptcy to keep that money out of the clutches of the Chapter 7 Trustee. Whether you and your attorney choose state exemptions or federal exemptions depends upon the value of all of your assets and what type of assets you have.
Using Federal Exemptions to Exempt your Investment Accounts from the Bankruptcy Estate
If all you own are the investment accounts, know that the federal exemptions provide for protection of up to $13,400 in loan value, accrued dividends, or interest in a life insurance policy (11 U.S.C. § 522(d)(8)), and provides that IRAs and Roth IRAs are exempt up to $1,362,800 (11 U.S.C. § 522(n)).
If your investments are not protected under these exemptions, there are other exemptions you can use. For example, if you do not own a home or you owe more on you home than what it is worth, you do not need to exempt home any equity and you can apply for the federal homestead exemption in the amount of $25,150 to your investments instead (11 U.S.C. § 522(d)(1)).
If you have applied for these exemptions and there remain investments that are still not exempted from the estate, you can also apply for the federal wildcard exemption in the amount of $12,575 to those accounts (11 U.S.C. § 522(d)(5)).
Using State Exemptions to Exempt your Investment Accounts from the Bankruptcy Estate
Some states require debtors to use their state exemptions, while others give debtors the option of using state or federal exemptions. Your bankruptcy attorney will be able to tell you what exemptions are available to you. In many instances, the state exemption scheme is more generous than the federal scheme.
Retirement Accounts May Be Exempt from Your Bankruptcy Estate
While the Bankruptcy Code is federal law, bankruptcy judges apply the law of the state in which they sit in many circumstances. Whether investment accounts are part of the bankruptcy estate is one such instance.
As a result, in some states, IRAs, 401(k)s, and other tax-deferred retirement accounts are wholly exempted from the bankruptcy estate as a matter of state law. For this reason, there is no need to apply exemptions to those types of investment accounts.
Filing Chapter 13 to Keep Your Investments
If you have investments that are part of your bankruptcy estate and cannot be wholly exempted, you can still file bankruptcy but you will have to pay your creditors the amount they would have gotten had the Trustee seized your account.
Simply subtract the amount you can exempt from the balance of your investments on the date of filing, and your creditors are entitled to be paid that amount pro rata. In a Chapter 13 case, you will have three or five years to pay it off. If you have substantial debt and need to file bankruptcy, it may be worth your while to pay a little in order to discharge a lot.
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.