Deferred Compensation, Part V: Exemption Planning

When a person declares bankruptcy, all of their property becomes part of the estate -- the total assets that are used to pay existing creditors.  Here is the exact definition contained in the bankruptcy code:

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

      (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.

       (2) All interests of the debtor and the debtor’s spouse in community property as of the commencement of the case that is --

        (A) under the sole, equal, or joint management and control of the debtor; or

        (B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor’s spouse, to the extent that such interest is so liable.

This is very similar to the definition the gross estate in the estate tax code or gross income in §61 -- it's an exceedingly broad definition, designed to include every piece of property owned by the debtor.  

The code, however, does allow several specific exemptions.  Under the federal statute, the debtor may choose federal or state law exemptions.  Under federal statute, retirement plans are excluded 

§522(b)(1) Notwithstanding section 541 of this title, an individual debtor may exempt from property of the estate the property listed in either paragraph (2) or, in the alternative, paragraph (3) of this subsection.

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     (C) retirement funds to the extent that those funds are in a fund or account that is                exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the                 Internal Revenue Code of 1986.

 Most states allow this exemption as well.