Can Creditors Take My IRA Rollover in Bankruptcy?

Rollover

According to the Internal Revenue Service, "generally, a rollover is a tax-free distribution of cash or other assets from one retirement plan to another retirement plan." A distribution is an amount that is paid to you from your retirement plan. An IRA rollover is a distribution to an IRA. You have 60 days from the date of your distribution to contribute the funds to your IRA. Waiting too long will have negative tax consequences; moreover, it will make the funds vulnerable to the trustee, who might treat it as regular income and give it to your creditors.

Your IRA rollover should be safe from your creditors when you file bankruptcy. While there are multiple types of bankruptcy, including Chapters 7, 9 and 13, to name a few, consumers typically file either a Chapter 7 or Chapter 13. Both provide relief from collection efforts and personal liability for certain debts; however, a Chapter 7 usually ends in about six months, while a Chapter 13 usually ends in three or five years.

Your IRA rollover generally is a protected portion of the bankruptcy estate. According to the Administrative Office of the U.S. Courts, the bankruptcy estate includes "all legal or equitable interests of the debtor in property at the time of the bankruptcy filing." The court appoints a trustee to exercise powers granted to her by bankruptcy law, such as checking your estate for nonexempt assets she can liquidate for your creditors.

Your IRA rollover is generally considered exempt property. By way of federal authority, states can choose their own bankruptcy exemptions. While these exemptions vary from state to state, the general position is that the entire balance of the IRA rollover is exempt. This means the bankruptcy trustee may not take it away from you and give it to your creditors. A different exemption may apply to the funds in your IRA that weren't rolled over. If your state applies the federal exemption, those funds are exempt for up to $1 million.