Having bankruptcy protection is important when you have one or a number of accounts that houses your hard-earned money. Bankruptcy protection comes in handy in case you find yourself in the situation of recovering from a financial crisis by way of filing for bankruptcy. Thanks to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, also known as the BAPCPA, certain accounts are eligible for bankruptcy protection and will not be touched in the case of needing to file for bankruptcy. Read on for more information on the BAPCPA and the certain accounts that qualify for bankruptcy protection.
What Happens During Bankruptcy?
Having some accounts that are covered under bankruptcy protection are important when you find it necessary to file for bankruptcy. During the process of bankruptcy, you report all financial information, including income earnings, expenses, and monetary and physical assets. So, during the process, the financial institution where you are filing bankruptcy determines what assets can be used by creditors to take care of your debts. These assets can include valuable property, merchandise, and even savings stashed away in accounts. It is already difficult to know that bankruptcy will strip you of your valuable assets, but to be stripped of your hard-earned saved money could be too devastating to bear. That is where savings accounts that is under bankruptcy protection come into play. These beneficial accounts are covered under the BAPCPA and certain aspects may qualify you to obtain one of these accounts.
More Information on BAPCPA
In accordance to the law, BAPCPA aims toward adjusting the federal bankruptcy law and to restate specific requirements that take care of the discharge or alteration of a Chapter 7, 11, or 13 filing. The BAPCPA also includes guidelines for retirement funds that include the various types of IRAs and qualified plans, and also educational savings accounts. In some cases, limitations and unlimited protection do apply under the act. Continue reading for an explanation of such cases.
Employee Retirement Income Security Plans
One of the accounts that qualify for bankruptcy protection is retirement plans that meet the qualifications under the Employee Retirement Income Security Act or the ERISA. All plans that are qualified under the ERISA can be excluded from assets that must be reported when filing for bankruptcy. Determined by a Supreme Court ruling in 1992, ERISA plans are not included in individual’s bankruptcy assets. Under the Federal Bankruptcy Code, the BAPCPA has guaranteed that under this act, all accounts that qualify are under bankruptcy protection for no specific number of accounts sponsored by employers.
At one point in time, whether or not a plan qualified under ERISA depended on if the plan was sponsored by employers or not. Plans that qualified that covered business owners only did not meet the specific requirements of the ERISA. So, the plans were not qualified for bankruptcy protection. Now, qualification for bankruptcy protection is according to the BAPCPA and the plans are not to be included with assets that are assessable through bankruptcy.
The Different Types of IRAs
Because of the BAPCPA, IRAs are also eligible for bankruptcy protection. There are many types of IRAs that are protected during the bankruptcy protection. Below is an explanation of each type:
- Traditional and Roth IRAs exclude up to $1 million. The specified amount must be looked over every three years to figure out if the $1-million dollar amount should increase or not. The increase depends on the consumer price index.
- SEP and Simple IRAs exclude all figures from the bankruptcy’s estate for no specific amount.
529 Plans and Educational Savings Accounts
Other plans and accounts that are under the bankruptcy protection provided under the BAPCPA are 529 plans and education savings accounts. Below are the limitations that are applied to covering the education saving accounts and 529 plans:
- Contributions toward ESAs that are in excess or that are not eligible are not excluded from the bankruptcy estate.
- Any amount that is put into an ESA during a 365-day period before you file bankruptcy is not left out of the bankruptcy estate.
- Any amount that is put into an ESA or 529 plan during the 365-day to 720-day period before you file bankruptcy are limited to exclude $5,000.
- Although any can add to the account on behalf of the account’s beneficiary, only additions to the account of the debtor’s children (step-children and grandchildren included) are excluded.
In conclusion, the BAPCPA is an act that is threatening to the process of filing for bankruptcy because it puts a limit on what assets can be taken during the process. Having these certain accounts will be beneficial for you if you have to file for bankruptcy because despite you losing a ton of assets in order to get back on financial track, you will still have the money you put into the bankruptcy protected accounts.