bankruptcy myths Archives - Better Call Dave

August 19, 2025August 19, 2025

Top 7 Bankruptcy Myths: Myth No. 5 – I will Lose my 401K, Pension and IRA

By Dave Kelly, Minnesota Bankruptcy Lawyer

This is the 5th post of my series on the top seven myths about consumer bankruptcy. In almost 50 years of law practice, I’ve never had a bankruptcy client lose their pension, 401K, 403B or IRA.

What is the “Bankruptcy Estate”?

As you start working on preparing to file your bankruptcy, you may hear reference to the idea of “bankruptcy estate.” The bankruptcy estate is a theoretical category of assets that the bankruptcy trustee can take, liquidate and distribute to your creditors – UNLESS you claim them as exempt. Almost everything you own will ordinarily be in this category. You can see the importance of being able to claim your stuff as exempt.

You may have some things, however, that are outside the bankruptcy estate. Anything that isn’t really yours is probably outside the bankruptcy estate. One example might be an automobile that you use but which is titled in someone else’s name. When an asset is outside the bankruptcy estate, you don’t need to claim it as exempt because the trustee can’t touch it whether you claim it as exempt or not. Just to make sure, I like to claim such things as exempt anyway if I can. I’ll describe the asset as “not part of bankruptcy estate and of no value to bankruptcy estate; listed here for information purposes only.”

Pensions, 401K accounts and 403B accounts are usually outside the bankruptcy estate. This is because they are protected by a federal law called the Employee Retirement Income Security Act of 1974. Also known as ERISA, this law erects a barrier which in the vast majority of cases keeps bankruptcy trustees away. As long as it’s an ERISA qualified account, it’s safe. With any such account, it’s a good idea to check and make sure that it is ERISA qualified. Your lawyer should be able to tell by looking at it.

Included in the Bankruptcy Estate

For reasons I have never quite understood, IRA accounts are typically not protected by ERISA. This means that they are within the bankruptcy estate. Before filing your case you want to be sure that the account can be claimed as exempt.

Most of my cases are filed using the federal exemptions. The only reason to use the alternative, which is the state exemptions, would be to protect the equity in a home. Under the federal exemptions IRA accounts are exempt. There is no limit under the federal exemptions as to the amount in the IRA account.

If you need to use the Minnesota state exemptions, there is a dollar limit. Under Section 550.37 IRA accounts are exempt up to $81,000 at the time of this writing. Scroll down to the section on “Employee Benefits.”

Exceptions to Watch Out For

You have to be careful about any kind of retirement account or pension that you have either inherited or acquired through a divorce. Those are tricky and might under some circumstances be reachable by a bankruptcy trustee.

One big problem is inherited IRAs. If the IRA account is inherited, it’s usually not exempt. It’s not considered to be a real retirement asset because you are not the one who put it aside so you could retire some day.

Another problem could be a 401K which is on it’s way to you from either an inheritance or a divorce. One of the main problems with these is that there is so much paperwork involved in getting the account transferred to you. If the account is somewhere in the pipeline on it’s way to you, the trustee in bankruptcy may get her hands on it.

To be ERISA protected the account has to have gone through all the hoops to the point that it is set up in a new 401K account with your name on it and under your social security number. Even then you better have your lawyer take a close look at it. When it’s not an account that comes to you through the usual process of being accumulated at your place of employment, I’m always afraid that a trustee might somehow be able to get at it.

Often in divorce situations accounts sit with the transfer incomplete. The divorce decree alone is not enough to transfer the account, but most people don’t know that. If you received any kind of pension or retirement account through a divorce, be sure you let your lawyer know that’s where it came from. The rules regarding that account may be different.

This post is for information purposes only and is not intended to be a substitute for having a real attorney take a close look at what retirement funds you have. Don’t try to file a bankruptcy by yourself. Get a lawyer.

Better call Dave. 952-544-6356.

October 1, 2024October 1, 2024

Top 7 Bankruptcy Myths: Myth No. 4 – You Can Choose Which Debts to List

By Dave Kelly, Minnesota Bankruptcy Lawyer

No Such Thing as a Partial Bankruptcy

I keep hearing from people who want to file a partial bankruptcy. The trouble is that bankruptcy is a 100% deal. If you are in at all you have to be all in. Often someone will call me and what’s on their mind is that one creditor who won’t leave them alone. All their financial affairs seem to be in order except for one creditor. What they want to do is somehow file just on that creditor and leave the rest of their debts alone. The trouble is that the law won’t allow you to do that. There is no such thing as a partial Chapter 7 or Chapter 13 bankruptcy.

All Creditors Must Be Treated (or Mistreated) Equally

In Chapter 7 or Chapter 13 bankruptcy, you are required to list all of your debts and all of your assets. You are not allowed to say you want to get rid of certain unsecured debts but still pay others. The authors of the bankruptcy code believed in equality. It has always been a general principle of bankruptcy law that all the unsecured creditors are to be inconvenienced equally. If there are assets to be distributed to the unsecured creditors, they each get a proportionate share based on the amount of the debt.

Debts You Need to Keep

There may be certain debts that you need to keep, such as your car loan or your mortgage. If you want to keep your car, you have to keep paying the car loan. If you want to keep your house, you have to keep paying your mortgage. The car loan and the mortgage have to be listed in the bankruptcy, but usually you can make arrangements to keep paying them anyway.

Notice that above, where I was talking about treating creditors equally, I was talking about unsecured creditors. Secured debts are a different matter. Secured debts such as a home mortgage or a car loans are considered to be necessities of life. The bankruptcy trustee will usually expect you to keep paying them. If the secured debt is for a boat or a motorcycle, however, you will probably be expected to stop paying and surrender the collateral to the lender. You can’t get away with claiming you are too poor to pay your creditors EXCEPT you can still afford the loan for a boat or motorcycle. Take a look at my post about Harleys. Also see my post about boats, motorcycles and horses.

Keeping Your House and Car

If you want to keep your house or your car or both, the bankruptcy trustee will be fine with you continuing to make payments on the mortgage or car loan. There is a thing called a reaffirmation agreement which will reinstate the debt as if the bankruptcy never happened. Generally I am against having my clients sign such agreements. They usually have to be approved by a judge, and the judges don’t like them either. Ordinarily the lender will be glad to receive the payments and glad to let you keep the collateral, so the reaffirmation is not needed. Here’s what I had to say about reaffirmations in an earlier post. Also check out my pages about keeping your car and keeping your house.

Debts You Can’t Get Rid Of

There might be some other debts that you would like to get rid of, but the bankruptcy won’t make them go away. Student loans and recent tax debts would usually be in this category. A good lawyer will explain to you which debts are going away and which are not; and will also explain common tactics for what to do with the ones that are not going away.

Better call Dave: 9 52-544-6356

January 8, 2024February 20, 2024

Top 7 Myths About Bankruptcy: Myth No. 2 – I Will Lose my House and my Car

By Dave Kelly, Minnesota Bankruptcy Attorney

Introduction

This is the second post in my series about what I consider to be the top seven bankruptcy myths. When a potential client calls me for the first time one of the most common questions I hear is “I’ll lose my house if I file bankruptcy won’t I?” OR “I’ll have to give up my car if I file bankruptcy, right?” The answer to both of these questions is almost always NO, but sometimes I have a hard time convincing the caller. This myth seems to be a very powerful one that many people have been hearing all their lives.

The Debt is Discharged but Not the Lien

In the vast majority of cases my clients get to keep their house, if they have one, and keep their car – unless for some reason they don’t want to keep these things. Please understand that bankruptcy makes the debt go away but in general it does not release the lien of a mortgage or car loan. If there is a mortgage on your house, the house will still have the mortgage when you are done with the bankruptcy. And if there is a loan against your car, properly filed with the state so that is is listed on the car title, the lien from that loan will also still be there after the bankruptcy. Unless the debt is reaffirmed, you will no longer owe personally on the car loan and mortgage. But it is very much like the car still owes the car loan and the house still owes the mortgage.

Protect Your Equity by Claiming it as Exempt

Now if there is equity in the car or house, and there usually is, that equity is an asset in the bankruptcy case. By equity I mean the difference between what is owed and what the asset is worth, assuming it is a positive number. When a straight Chapter 7 bankruptcy is filed, a trustee is appointed by the court. The trustee’s job is to find assets that can be seized and divided among the creditors. My job, however, is to prevent that from happening. With houses and cars it is usually fairly easy. The way to keep the trustee from taking an asset is to claim it as exempt. There is usually enough exemption to cover the equity in a car; and there is almost always enough Minnesota exemption to cover the equity in a house.

In Minnesota we get to choose between two exemption lists – either the state exemptions or the federal exemptions. Under the state exemptions a debtor is allowed an exemption of up to $480,000 of equity in a homestead and up to $5,200 or equity in a motor vehicle. The federal exemptions are not so good for protecting a homestead, but for a car they protect up to $4,450 of equity in a motor vehicle. The federal exemptions also contain a wile card of more than $15,000, under which anything not otherwise exempt can still be claimed as exempt. If there’s a lot of equity in a car, the wild card can be very handy to protect whatever is not covered by the automobile exemption.

Bottom Line

In the vast majority of cases, Minnesota residents who file bankruptcy are able to keep their vehicles and keep their homes. Those who tell you otherwise are perpetuating a common myth.