Planning Retirement Distributions To Qualify For Chapter 7

Withdrawals from your IRA or other tax deferred retirement accounts is part of income for purposes of calculating eligibility for Chapter 7 bankruptcy under the means test. Many debtors facing bankruptcy are using retirement income to survive financially, and some debtors over 70 ½ year of age are required to take minimum retirement distributions. Planning retirement distributions intelligently is important for bankruptcy qualification.

One of my bankruptcy clients was over 70 ½ and had to take a minimum distribution each year from a relatively substantial IRA account. . The debtor had been withdrawing the minimum distribution monthly in equal amounts. His IRA distribution, together with other income other than social security, was too high to pass the means test for purposes of filing Chapter 7 bankruptcy.

I advised the client to reschedule his IRA minimum distributions. I told him to take no IRA distributions for six months, and to take the balance of his required annual minimum in December. Six months from now, in November, his income for means test calculations will include no IRA distributions. He will be able to pass the means test. The large IRA distribution in December will be received post-petition and will not be included for bankruptcy qualification purposes.

IRA and other retirement plan distributions are exempt property. It may seem unfair that such exempt distributions could disqualify someone from filing bankruptcy. Fair or not, bankruptcy debtors should understand how retirement income may affect their bankruptcy eligibility. Perspective bankruptcy debtor cannot usually control the timing of periodic wages, interests, dividends and most other income, but they usually can control the timing of retirement distributions. Planning such retirement income can be critical for some people trying to file Chapter 7 bankruptcy.

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