This personal bankruptcy story was shared in 2011 on a bankruptcy forum website: “When granted noncollectable status, they tried but were unable to seize my union pension I receive in the form of holiday checks once a year. Twenty five percent is being withheld from the pension check I receive by the union for tax purposes…What will happen to the pension account as a result of discharged tax debts if I decide to file a Chapter 7 bankruptcy?”
A Chapter 7 bankruptcy is a type of bankruptcy that can be filed by individuals, corporations, married couples, and partnerships. When filed, a bankruptcy court trustee will take your non-exempt assets and liquidate them to pay off as much of your unsecured debt as they can. What debt is not paid off by the sell of your non-exempt assets will be discharged at the end of the bankruptcy process.
Pension funds are not normally seized or liquidated in a Chapter 7 bankruptcy. A union pension is treated like any other type of retirement account in the process. State and federal laws determine how retirement accounts are affected. For the most part under federal exemption laws, all retirement account funds are exempt from bankruptcy liquidation if they are exempt from taxation under sections 401, 403, 408, 414, 457, and 502 of the Internal Revenue Code.
That means a bankruptcy trustee cannot seize revenues paid you by the pension plan to satisfy unsecured debts if the retirement revenues fall under those IRS guidelines, but depending on the state you live, the affects on your retirement plan may vary if the revenues do not fall under the guidelines. There is normally no cap placed on the amount you can receive in retirement when your retirement account is exempt.
On the other hand, the pension money remaining in the account that has been withheld for tax purposes is treated differently. Discharged tax debts can only be tax debts that have been discharged under certain criteria. Taxes other than income, such as payroll taxes or fraud penalties, cannot be discharged. To discharge a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy.
In the case of the debtor who has asked the question in the illustration, the taxes in question are withheld income taxes the pension plan is required to withhold by IRS rules. These are current withholding taxes and would certainly not be subject to discharge in a Chapter 7 bankruptcy case or any other type of bankruptcy.
That means the pension fund administrator would be required to send the withholding taxes to the IRS at the end of the year to be processed as a part of your current income tax filing. The debtor would receive any refund he is due from his income tax return. The refund would not be a part of the discharged taxes and would be subject to any money currently owed the IRS, but the IRS would not be allowed to use the money to cover taxes that have already been discharged.
If you have similar circumstances and are considering filing bankruptcy, contact us today, and we will help you find a bankruptcy attorney in your area who will help you understand how these complex bankruptcy laws may apply in your particular circumstance.
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