The Wiewel Law Firm

Some Creditors Can Garnish Your Social Security

The IRS and those holding your school loans can take aim at your benefits.

You have worked your whole working life for Social Security in your retirement and it is relatively safe from creditors, with a few exceptions, according to Yahoo! Finance in “Can Creditors Come After Your Social Security Benefits.”

Personal loan payments, credit card payments, or medical bills are usually not able to take your Social Security benefits. However, there are some exceptions you’ll need to know about:

• The IRS will not blink at taking up to 15% of your benefits, if your taxes are not paid.
• If you owe on student loans, the loan companies can come after your Social Security benefits, even if the debt is decades old.
• The same is true if you are behind on either child support or alimony payments.

As long as your outstanding debt is not tax-related, the first $750 of your benefits is protected from being garnished. However, if you’re behind on child support or alimony, you could lose more than 50% of those benefits.

There are steps to take if debt is an issue. First, if you owe money to the IRS, contact the local IRS office to work out a payment plan. They will almost always work with people to reach an agreement on an installment payment plan. This will avoid having your benefits garnished.

If you’re behind on student loan payments, reach out to the lender and work out an arrangement. If you can prove that your financial situation is dire, you might be able to come up with a deferred payment plan or change the repayment schedule.

If things are really bad, consider filing for bankruptcy. If you do, realize that not all your debt will be dischargeable, including the IRS and school loans.

This might be a situation where a bankruptcy attorney or a debt settlement firm is needed. Be very cautious about working with a debt settlement firm, to be sure that they are credible and trustworthy. The firm or the attorney will be able to help negotiate the debts. Remember that the ultimate goal of any creditor is to get paid, and sometimes getting paid half is better than not being paid at all.

Reference: Yahoo! Finance (April 27, 2019) “Can Creditors Come After Your Social Security Benefits”

Can Bankruptcy have an Impact on Your IRA?

Protection varies, according to state law.

IRAs are protected from bankruptcy. However, there are some limitations you should guard against, according to The Balance in “What is IRA Bankruptcy Protection?”  

President George W. Bush signed bankruptcy protection into law in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA). This new law insulated retirement accounts from creditors, by providing that contributions to various retirement plans were excluded from the property of the estate. This was the first time that protection for individual retirement accounts existed. 

Today, IRA bankruptcy protection includes all the retirement accounts: traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs and rollover IRAs. Protection is limited by the amount, which increases on a regular basis.

Here’s a look at the IRA bankruptcy protection from BAPCA:

Traditional IRAs and Roth IRAs: The most recent adjustment was in 2016, when the protection limit was increased to $1,283,025.

SEP IRAs and SIMPLE IRAs: These IRAs receive the same protection limits as traditional and Roth IRAs. They are used by self-employed people and small businesses.

Rollover IRAs: These are traditional and Roth IRAs that were funded by rollover transfers from an employer-sponsored retirement plan, like a traditional 401(k) or a Roth 401(k).

These protections are considered to be high enough to cover most American’s IRA accounts. There are some assets that are not protected. Some examples include general creditors, IRS levies and divorce.

General Creditors: There’s no federal protection for IRA owners, and the protection from general creditors varies by state law.

IRA Assets and IRS Levy: If you owe past taxes to the IRS, they can levy your pay and your IRA. They’ll generally go after other assets first, but if necessary, your IRA is fair game.

IRA Assets and Divorce: What happens to your IRA in a divorce, depends upon a court order and other assets that are held. If IRA assets are divided, taxes can be avoided. According to the “incident to divorce” rules in the tax code, IRA assets can be transferred and split between spouses without taxation within one year of the formal divorce date. This is one where you want a skilled CPA and matrimonial attorney on your side, so the tax liability is minimized.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances, as well as advise you on protecting your IRA assets.

Reference: The Balance (Dec. 12, 2018) “What is IRA Bankruptcy Protection?”

Andreas Lubitz's Estate Declares Bankruptcy

No one has claimed to be the heir to the estate of the German co-pilot who is alleged to have intentionally crashed a plane into the Alps. Now, the estate has filed for bankruptcy.

If you have watched the news the past few months, then you undoubtedly know the story of Andreas Lubitz. The German co-pilot is alleged to have suffered from severe mental illness. On March 24, while the fellow pilot of a passenger plan was using the restroom, Lubitz is believed to have intentionally crashed the plane into the Alps, killing 150 people.

His estate will undoubtedly be ordered to pay millions of dollars in compensation to the families of the people who died in the crash. These would be considered debts of his estate. Under German law anyone who claimed the assets of the estate would also be liable to pay any debts of the estate. Thus, understandably no one has made a claim for Lubitz's estate. The executor of the estate, under the belief that the assets of the estate will be less than the debts, has as a consequence filed for bankruptcy. The Associated Press reported this story in "Germanwings co-pilot Lubitz's estate is declared bankrupt."

While this case is unusual both for its circumstances and the media attention it has received, it highlights a somewhat common occurrence. It is not all that unusual for an estate to have more debts than assets, especially when the deceased faces civil lawsuits. Unfortunately, what that normally means is that estate creditors do not receive full compensation as it is not the responsibility of anyone else to pay the deceased's debts.

Reference: Associated Press (July 10, 2015) "German wings co-pilot Lubitz's estate is declared bankrupt."

A New Supreme Court Decision Impacts Estate Planning

A ruling by the U.S. Supreme Court holding that assets contained in an inherited individual retirement account (IRA) don’t qualify as retirement funds for the purposes of bankruptcy exemption has turned the estate planning community on its head. The Supreme Court’s ruling is “sending seismic shock waves through the estate planning community,” said Gail Buckner, a retirement and financial planning specialist and instructor with Franklin Templeton Investment.

The ruling will make it easier for creditors and bankruptcy attorneys to lay claim on inherited retirement assets, experts say.

In Clark v. Rameker, the Supreme Court unanimously affirmed a lower court ruling in favor of bankruptcy trustee William J. Rameker. The Rameker decision impacts a sizeable segment of the nation's wealth. Quite clearly, inherited retirement assets are no longer as "bulletproof" from creditors as they were before the decision.

A recent InsuranceNewsNet article, titled "Court Decision Has Implications For Estate Planning," explained that the Supreme Court was asked if federal bankruptcy law exempted an inherited IRA from a debtor’s estate in bankruptcy. Justice Sonia Sotomayor wrote in her decision that an inherited IRA account did not qualify as a retirement fund, so it would not be exempt. Inherited IRAs do not fall under the definition of a retirement fund, the Justices held, because the heir to the fund, other than a spouse, is not permitted to put money into the account. The accountholder (or heir) must also withdraw all of the funds from the account or set up annual distributions. It does not matter how close this inherited IRA accountholder is to retirement, and he or she must pay taxes on those distributions. Permitting an inherited IRA to be exempt from creditor claims would ultimately undermine the purpose of the Bankruptcy Code, Sotomayor explained.

What does this mean for your IRA? How will you handle it in your estate planning strategy?

Speak with your estate planning attorney, get a thorough explanation, and put a sound plan in place.

Reference:  InsuranceNewsNet (July 24, 2014) "Court Decision Has Implications For Estate Planning"

US Supreme Court Says IRAs Fair Game for Debts

The U.S. Supreme Court ruled that certain money inherited from individual retirement accounts can be taken by creditors to cover the debts of people in bankruptcy proceedings. In a unanimous ruling written by Justice Sonia Sotomayor, the court said inherited IRA money not received from a spouse isn't protected in bankruptcy proceedings.

"Nothing about the inherited IRA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete," Justice Sotomayor wrote.

The Supreme Court ruling applies to inherited IRAs but not to other types of retirement accounts. It also clarified instructions in the Bankruptcy Code, as millions of baby boomers begin to leave behind unspent IRA money to families and loved ones.

The Wall Street Journal article, "Supreme Court Allows Creditors to Tap Into Inherited IRA Money," notes that courts have been divided on whether money that an individual inherits from an IRA should get special protection. Bankruptcy law protects certain property that creditors would want to seize to pay debts, which can include some equity in a person's primary residence, an inexpensive car or a few hundred dollars worth of household furniture. The reasoning behind this protection is that people need a base on which to rebuild their lives once they clear their debts. These same rules permit people to keep up to $1.3 million in retirement funds they have in an IRA.

This inheritance issue came up in the case of a couple who filed for bankruptcy in 2010. They inherited $293,000 of IRA money which the wife received when her mother died in 2001. Lawyers for the couple argued the money was protected from debts that stemmed from closing their pizza shop in 2009. The bankruptcy trustee sought those funds to cover, among other things, a $74,000 judgment in favor of the restaurant's landlord.

The Wall Street Journal article stated that last year more than 45 million U.S. households had some type of retirement account and the overall value of those accounts was more than $5.7 trillion in the second quarter of 2013, according to the Investment Company Institute, a Washington, D.C.-based trade association for U.S. investment firms. The WSJ said that it was not clear how many people file for bankruptcy with inherited IRA money in their possession.

Reference:  Wall Street Journal (June 12, 2014) "Supreme Court Allows Creditors to Tap Into Inherited IRA Money"

Bankruptcy And The Inherited IRA

The U.S. Supreme Court will hear a dispute in the bankruptcy of a small-town pizza shop owner, taking on a case that could dictate how inherited individual retirement accounts are treated in bankruptcy.

Is a retirement account that is “inherited” still a retirement account? This may sound like a rhetorical question, but it is currently one before the U.S. Supreme Court in the matter of Clark et ux. V. Rameker et al.The decision could have important ramifications for those who are looking to leave an IRA to their heirs – and NOT to the heirs and their creditors.

This issue was explored by Reuters in a recent article titled “U.S. high court to chart fate of inherited IRAs in bankruptcy.”

You see, the Clarks inherited a $300,000 IRA and then went into bankruptcy to the tune of some $700,000. Consequently, when the bankruptcy trustee became mighty interested in the IRA, the Clarks cried foul. As a general rule, IRAs are exempt from many bankruptcy proceedings of the account owner. Some courts have upheld this protection even when the account is inherited by one who is not yet a retiree and is not the account owner, but still complies with the strict distribution requirements for inherited IRAs.

Other courts have been less favorable and now it is up to the highest court.

It may seem strange to think about bankruptcy when planning for the eventual distribution of your IRA to heirs. After all, leaving your heirs behind is one thing, but ensuring that they are protected is a still greater step.

How will the Supreme Court determination affect you?

Reference: Reuters (November 26, 2013) “U.S. high court to chart fate of inherited IRAs in bankruptcy”