Bankruptcy Legislation May Shield Retirement Funds

The House and Senate have both approved bankruptcy reform legislation and both chambers agree that new bankruptcy legislation should exempt funds in retirement accounts from the bankruptcy estate of debtors. Proposed legislation would also prevent debtors from discharging retirement plan loans through a bankruptcy proceeding.

The bills would shield from a bankruptcy estate retirement assets in qualified plans, IRAs, and other tax-exempt funds. The protection would extend to eligible rollover distributions that are indeed rolled over. Legislators favor limiting the amount of protection of IRA accounts to amounts under $1 million.

The Bankruptcy Abuse and Prevention Act of 2001 (H.R. 333) was passed by the House on March 1, 2001. The Senate subsequently approved the Bankruptcy Reform Act of 2001 (S. 420) on March 15. Although the bills are very similar, negotiations to agree on a final measure have proven unsuccessful to date.

An attempt at bankruptcy reform was vetoed by President Clinton last year. President Bush has indicated he supports bankruptcy reform.