Retirement Funds and Bankruptcy

Unfortunately, many people have already withdrawn money from their retirement accounts or taken out a 401k loan in an attempt to pay off their debt before meeting with a bankruptcy attorney. Oftentimes, the 401k loan or retirement distribution is not enough to pay off all the debts and with compounding high interest rates the unpaid debts begin to grow again. Even worse, the 401k loans must be paid back and if a distribution was taken then significant income tax consequences generally result unexpectedly. Please read below to understand how this may affect you and speak to a bankruptcy attorney to save your retirement.

Can You Lose Your Retirement Savings In Bankruptcy?

STOP and speak to us TODAY!!! Under most circumstances, the money you have saved in your retirement account is 100% exempt by law, which means that creditors cannot garnish or otherwise force you to turnover any funds that are held in a qualified retirement account. Congress overhauled the bankruptcy laws in 2005, which exempted virtually all ERISA-qualified retirement accounts. Retirement accounts that are excluded from the bankruptcy estate include:

  • 401(k)s
  • 403(b)s
  • Profit-sharing plans
  • Keoghs
  • Money purchase plans
  • Defined-benefit plans
  • IRAs (Roth, SEP, and SIMPLE with some limitations)

For the most part, you will get to keep all of the money you have saved in the above accounts. However, there are limitations placed on IRA accounts. If your IRA accounts exceed $1,362,800, then the excess amount of money above that limit can be taken by the bankruptcy court to pay creditors. This limit applies to the sum of all of your IRA accounts combined. You do not get to keep $1,362,800 per IRA account. The limit is adjusted every three years to account for any increases in the cost of living.

Are You About to Withdraw Money from Your Retirement Account or Obtain a 401k Loan?

If you withdraw retirement funds to help pay your daily living expenses for a few months, then those funds will lose their protection and past due creditors can seek to garnish (take) those funds that you may now have in a bank account. Setting an appointment with us to evaluate your decision can possibly save you thousands of dollars in retirement benefits.

An Example From A Past Client to Avoid

Our office met with a client who owed $40,000 in unsecured debt (credit card type debt). Prior to meeting with us, the client withdrew approximately $30,000 from his retirement account over the past 2 years to enable him to afford the monthly minimum payments on these credit cards. At the time of the appointment he had depleted his retirement, and since he could no longer continue to make the monthly minimum payments he now decided to speak to a bankruptcy attorney. Unfortunately, over the past 2 years the client lost his retirement savings, incurred significant tax penalties (approx. $3,000) for early withdrawal of his retirement, and he still owes the $40,000 in unsecured debt because the retirement withdrawals only paid interest and barely reduced the principal balance. If he had met with our office originally, he would have been advised to file the bankruptcy immediately before withdrawing retirement funds, which would have eliminated the unsecured debt completely, prevented any income tax penalties, and he would still have $30,000 in retirement savings at his disposal.

Filing For Bankruptcy After Retirement

Whether you file for bankruptcy before or after retirement can impact your retirement account. If you’re retired and taking income from your retirement account, then your retirement accounts will become more accessible to creditors. If you file for a Chapter 7 bankruptcy, any savings above what you need to reasonably support yourself could be used to pay creditors.  In a Chapter 13 bankruptcy, your retirement income will likely be factored into the determination of how much debt you can afford to repay.

Can You Retire During A Chapter 13 Bankruptcy?

Because Chapter 13 payment plans can span several years, you may decide you’d like to retire before your payment plan has ended. Retiring after you’ve filed for bankruptcy won’t put your retirement accounts in jeopardy. The important thing to consider is that retirement usually results in a drop in income. You still need to be able to make your required Chapter 13 payments for the remainder of your payment plan. If you default on your payments, your entire bankruptcy case could be placed in jeopardy. Therefore, you’ll want to make sure you can afford to retire and still make your monthly payments.

Speak With A Bankruptcy Lawyer At No Cost

The bankruptcy attorneys at A Bankruptcy Law Firm, LLC exclusively handle bankruptcy cases. Bankruptcy is all we do and we’d love to help you. If you’re burdened with debt and you’d like to save your retirement accounts, you can speak with one of our bankruptcy attorneys at no cost. We’ll analyze your financial situation and help you determine the best course of action. Call (800) 723-6766 or fill out a contact form to schedule a free consultation today.

Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.

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