Here are some of the most common questions you may have about how bankruptcy can impact your retirement assets:
No, in most cases your retirement plan is fully protected from your creditors in bankruptcy. Most retirement plans are protected under the Employee Retirement Income Security Act (ERISA), a law that was enacted to protect your retirement accounts from risky investments by your employer or plan administrator, but also prevents your bankruptcy trustee from seizing your retirement savings.
Your employer-provided 401(k) is considered a protected asset under state and federal law and can’t be legally touched by your creditors. These accounts do not need to be liquidated to pay your existing debts. However, once you transfer money from your 401(k) into a standard savings or checking account, the funds lose their exempt status and may be seized by collectors.
Fortunately, just like a 401(k), federal law protects IRAs from being seized by creditors during bankruptcy. While there is no maximum protection limit for SEP and SIMPLE IRAs, Roth IRA account protection is capped at $1,283,025 (with an adjustment scheduled for 2019 due to the rising cost of living). Keep in mind, this cap is the exemption limit for all Roth IRAs combined, not for each individual account.
Most retirement accounts are exempt from bankruptcy, including:
No, as soon as you take money out of your 401(k) plan and put it into another account, your retirement savings will lose their exempt status, and the money will become fair game for being seized by creditors.
When thinking about bankruptcy, we advise against allocating money from your 401(k) to accounts that will help pay off existing debt and bills. In this scenario, you will not only be faced with paying penalties for early withdraw, but also place your exempt 401(k) assets at risk of being collected by creditors.
While most retirement accounts are safe in bankruptcy, as mentioned above, withdrawing money from your retirement account prior to filing your case will place your savings at risk of being seized by creditors. This might include using the money to purchase other assets or placing it in a regular checking or savings account. In both cases, your assets lose protection.
While this may seem like a good idea based on the fact that retirement plans are protected in bankruptcy, in reality, making a large contribution to your retirement account right before declaring bankruptcy is not always a wise decision.
This could potentially be viewed by a trustee as an attempt to hinder, delay, defraud or shortchange a creditor, all of which place you at risk of losing exempt status of the property. It’s always best to discuss your plans to shift assets with your bankruptcy lawyer before following through with doing so.
Once you retire and begin taking distributions, your assets are more readily available to your creditors, but that amount will depend on how much money you need to meet your living expenses and which type of bankruptcy you file.
With Chapter 7 Bankruptcy, anything more than what you need to meet your basic living expenses will be available to creditors, while those who file Chapter 13 Bankruptcy will have their income from retirement plans included in the determination of how much you can afford to repay your debt.
This answer can depend on how you divide your assets. Technically, Social Security is protected under federal law from being seized by collectors, however, once the money hits your bank account, it is potential fair game to creditors.
Two months’ worth of benefits are legally protected from garnishment if deposited into an account that commingles with non-retirement savings. To completely protect Social Security assets, individuals should deposit these funds into a separate account solely dedicated to Social Security savings, thus preventing confusion as to which assets are which.
While bankruptcy can offer relief to seniors facing mountains of unpaid medical bills or credit card interest and late fees, in some cases, it may not be necessary for seniors to file for bankruptcy. Some seniors may be considered "judgement proof," meaning they do not have anything for creditors to collect. Dean Paolucci, our bankruptcy attorney, can help you determine if bankruptcy is right for your situation.
Contact us and tell us your financial situation, bankruptcy can probably help you.
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