The senators want to establish a "millionaires cap" that would provide blanket protection for all retirement assets up to a cap of $1 million. This would allow very wealthy individuals who declare bankruptcy and may owe creditors substantial sums of money to keep only $1 million in retirement assets.
The Sessions/Grassley proposal would scale back the cap in equal annual amounts from $1 million for a debtor at age 65 to $250,000 for a debtor at age 21. This feature takes into account the fact that debtors under age 65 have time to replenish retirement savings through future earnings and investment growth to reach the $1 million mark by age 65. In addition, bankruptcy court judges would have the power to let debtors keep more than $1 million if it was determined that the interests of justice so required.
"Our plan would let an individual in bankruptcy keep a million dollars in a retirement account, while at the same time prohibiting that debtor from stashing millions more in retirement accounts as a way to avoid paying what's owed to creditors," the senators said. The plan would replace a waiver provision in the bankruptcy bill that would allow middle-income debtors to waive bankruptcy protection for their retirement assets.
As members of the Senate Judiciary Committee, Sessions and Grassley are participating in the conference negotiations on H.R.833, the Bankruptcy Reform Act of 2000.
The measure they proposed today for the legislation under consideration by Senate and House negotiators responds to the current hodgepodge of state regulations that determine whether many retirement savings plans, including IRAs, must be surrendered to creditors during bankruptcy. "We want to give greater protection for retirement savings during bankruptcy proceedings to ensure that debtors will not be left impoverished in retirement," Sessions and Grassley said.
The U.S. Department of Justice, the Securities and Exchange Commission and some state attorneys general have asked Congress to make sure that this new level of federal protection does not become a loophole where multimillionaires and crooks can hide assets from legitimate creditors.
"Leaving an unlimited exemption for retirement accounts in the bankruptcy reform measure leaves the system open to abuse by big money debtors who exploit the bankruptcy code to avoid paying debts they have the money to pay. We shouldn't let these people stick it to the little guy who works hard to make ends meet," Sessions and Grassley said.
The Treasury Department said last month that the average value of all taxpayers' IRA accounts is $25,875.
The Sessions/Grassley millionaires cap would not apply to the defined benefit retirement plans of teachers, the police or any other government and non-profit employees.
The $1 million that would be protected from creditors under this proposal would be in addition to the $100,000 in home equity that every debtor is already permitted to keep during bankruptcy under the comprehensive reform proposal under consideration.
"Just as H.R.833 caps the amount of home equity that can be shielded during bankruptcy to prevent multimillionaires to avoid paying their fair share by putting their money into an estate in Florida, for example, the plan we put forward today prevents these big spenders from hiding exorbitant assets in a retirement account," Sessions and Grassley said. "This is a narrow exception to a new blanket federal protection of retirement assets in bankruptcy that is targeted at a narrow problem ? millionaire deadbeats and crooks."
The senators said if millionaires who exploit the bankruptcy system to their own advantage are allowed to do this, all the consumers who pay their own way are ultimately forced to pay more for basic goods and services when retailers raise their prices to make up for the money they have lost.