October 27, 2020

Retirement Account Documents – Read the Fine Print

We ran across a very interesting decision by Eastern District of Tennessee bankruptcy judge  Judge Richard Stair that disallowed the debtor’s claimed exemption of a $61,000+ retirement account in his Chapter 7 bankruptcy.   In the James L. Daley case, Judge Stair ruled in favor of the Chapter 7 trustee, who had objected to the exemption.  This means that if he remains in Chapter 7, Mr. Daley will have to liquidate his retirement account and pay the funds to the trustee.

Why did this happen?  The retirement funds at issue were contained in a Merrill Lynch IRA that appeared to constitute a qualified retirement account by the IRS.  Merrill Lynch even provided the debtor with a letter from the IRS stating that IRA accounts of this type had been deemed qualified.  So far so good.  Qualified retirement accounts are “exempt assets” in Tennessee bankruptcy cases.

The problem was this – the fine print of the account contained two problems:

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The Elderly and Bankruptcy: Seniors Make Up Largest Group Filing Personal Bankruptcy

In the last post, we discussed how student loans are not wiped out by bankruptcy and how those with student loans can deal with this type of debt. In this post, we discuss bankruptcy and the elderly and how seniors’ retirement funds may be protected by bankruptcy.

In the last eight years, Americans aged 55 and older have become the group most likely to file for personal bankruptcy, according to the AARP. Over half of people aged 50 and older that have debt spend the majority of their monthly income paying it off. Mortgages, home-equity loans, large credit-card balances, and loss of income are all reasons seniors are experiencing financial distress.

If the economic situation was not so dire, retirees may have been able to downsize their homes to pay off their debts, or get reverse mortgages. However, with the current declines in housing markets, many do not have enough equity in their homes to do so. Seniors that refinanced their mortgages during the real estate boom may have enormous mortgage payments. In many cases seniors owe more on their homes than they’re worth.

According to the National Foundation for Credit Counseling, seniors carrying high credit card debt into retirement, and the high interest payday loans against Social Security checks, produce the biggest burdens for senior debtors. With no income coming in, the debtor has fewer options for paying off the credit cards…and interest can grow quickly. Since last year’s market’s crash, many seniors don’t have as much money locked away as they planned.

Another possible contributing factor to senior’s financial troubles can be their own children. Many parents try to help their children financially even if they can’t afford to do so. Some financial advisers won’t even allow their clients to loan money to their children when they are in or near retirement to prevent their financial situation from going further south.

Many times bankruptcy is the best option for seniors with large debts. People with large medical debts can declare bankruptcy and keep their savings because assets in IRAs and other retirement accounts are protected from bankruptcy judgments up to $1 million. Depending on state laws, some debtors can keep their home as well.

Fortunately, there are agencies that are available to provide credit counseling or debt management services to those that need help. Talk to an experienced bankruptcy attorney to find the best route to take. Be careful as there are many scam artists that try and take advantage of senior citizens during their financial distress.