Are Profit-Sharing Plans Exempt from Bankruptcy?

One of the main reasons that people who are in financial trouble avoid taking the step of bankruptcy is that they have too many unanswered questions. One of the most pressing and urgent such questions is that of which assets are exempt from repossession or liquidation. For retirees or those close to retiring age, profit sharing plans exempt from bankruptcy may be a vital part of their financial planning.

Reasons for Exemption

One of the key considerations when wondering whether or not your profit sharing plan will be exempt is the matter of the plans’ being essential to your continued survival. The point of bankruptcy in the first place is to allow people to make a “fresh start” when they are unable to repay significant debt. For this reason, the courts will often allow you to retain assets if they can be deemed reasonable and essential to your survival. Federal law in the US, for instance, states that any kind of pension plan, profit sharing plan, or annuity is exempt “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.”

Types of Profit Sharing Plans Exempt

What this effectively means, of course, is that if a profit sharing plan is essential to your survival, you should be able to retain it through a bankruptcy. If, however, the plan could be seen as more of an extravagance, you might well have to liquidate it in order to satisfy any outstanding debts you might have to other creditors. For the average person who has gotten in over their head and needs to file bankruptcy, the profit sharing plans they have will be in the form of an IRA, a 401k, or something similar. These retirement-oriented types of profit sharing plans are nearly always exempt.

Always Consult an Attorney

Of course it goes without saying that even if you consider your profit sharing plan to be essential to your survival, the courts may not necessarily agree. In order to ensure that you get fair results in your bankruptcy trial, you should always seek the representation and advice of a qualified attorney. It’s also important to find one who is experienced in handling bankruptcy cases. There are countless loopholes and bits of fine print that need to be taken into account, and only an experienced attorney can do that.

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