If you are considering filing bankruptcy to alleviate debts, you may be wondering what will happen to your 401(k), IRA, pension, or other retirement account.
Whether you are retired and drawing from your savings or still working and worried about what effect filing bankruptcy could have on your future, it's important to have the facts.
The good news is that in most cases, a debtor's retirement income or retirement savings is exempt in bankruptcy proceedings, meaning the debtor may keep any money set aside for retirement.
However, the protection typically only applies to money that is still invested in the account. Any money withdrawn from retirement accounts may be used by the bankruptcy courts to repay creditors.
In addition, the protection only applies to qualified retirement accounts, which typically means those with a special tax status. If you or your employer's contributions to your retirement account are exempt from income tax, then it is most likely a qualified retirement account.
However, if your retirement savings are simply in a regular bank savings account, it may not be considered a qualified retirement account, and would therefore lose its exempt status, whether in a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.
Also, there may be limits on how much of a retirement account is exempt from bankruptcy proceedings. For example, a 401(k) may be considered exempt up to $1 million. If the value of a 401(k) exceeds $1 million, only the amount above the exemption may be used to pay creditors.
The 2005 bankruptcy law takes special care to protect retirement accounts from creditors. Many debtors facing credit card debt or medical debt consider cashing in their retirement savings in order to pay down these debts.
However, this misguided practice can often do more harm to a debtor's finances than good:
If you are interested in learning more about how filing bankruptcy may protect your retirement income or additional exemptions in your state, or if you are ready to put an end to creditor harassment, connect with a local bankruptcy lawyer.
Simply fill out our bankruptcy case evaluation form or call 877-349-1309 to connect with a bankruptcy attorney near you today.