In a Chapter 7 personal bankruptcy, retirement monies are generally exempt. So long as they are in a qualified account, and are under 1,245,475, that is. Almost all of our clients can keep their retirement monies.
ODRO in Bankruptcy
What about divorce? In a divorce, retirement accounts are often divided in what is called a QDRO, or Qualified Domestic Relations Order. The amount of the division is either agreed upon in a settlement agreement or ordered by the Judge in a Massachusetts Probate and Family Court. The Order, once signed by a judge, is served upon the custodian of the retirement plan, Fidelity, Schwab, or some other financial institution, who divides the monies per the Order. Usually, the receiving spouse takes the money into an IRA account where it remains tax-free until it is withdrawn; if it comes from a ROTH IRA, it is tax free upon most withdrawals.
What if there No QDRO?
In a case that came down from the Bankruptcy Court, In Re Lauren Remia, in December, 2013, a debtor filed for bankruptcy and expected monies in her ex-husband’s retirement account, that was attributable to her, would be exempt. The Trustee objected to the monies as exempt and the matter went to the Court. The Bankruptcy court reviewed the matter and determined that a QDRO, that is an actual division, was not necessary. Even though the ex-wife merely had an “equitable right” to payment and not the actual monies in her own separate account, the Court found that the monies did in fact belong to the ex-wife, and that the divorce court’s order “extinguished her former husband’s interest” in the monies.
The Trustee also objected to the exemption saying that even if the debtor had an interest, the monies were not exempt because the debtor was “not a beneficiary of the Retirement Plan entitled to a tax exempt status under ERISA…” The Bankruptcy Court was not persuaded by this argument either, saying that the monies were clearly in an ERISA protected account, notwithstanding the fact that the name on the account was not the debtor’s (it was the ex-husband’s).
Bankruptcy and Divorce: Get and Experienced Bankruptcy Lawyer
What can we learn from this case? First, be sure your divorce lawyer has experience in dividing assets such as retirement accounts. In this case, the separation agreement signed by the parties simply said the husband’s retirement account would be divided equally. There was no provision for a QDRO and it would have made it cleaner and avoided the Trustee’s Objection. It is not clear from the decision why there was no QDRO.
An experienced bankruptcy attorney would be required to fight the Trustee in any case against a debtor such as Ms. Remia’s case. She was fortunate to have an expert bankruptcy attorney who presented a path for an equitable resolution.
If you have debts that you just cannot pay, you may need a fresh start. Chapter 7 personal bankruptcy offers that. Call Attorney Neil Burns for a free consultation.
