What Happens to Retirement Accounts in Bankruptcy?
Even with numerous debts, retirees can now depend on their retirement accounts to fund their lifestyles as a result of the law passed by the United States Congress a few years ago. Also, a significant amount of retirement accounts are excused from bankruptcies – with each state having its exemption sets. However, several limitations exist.
Several factors determine what happens to your retirement accounts when you file for bankruptcy. One of which is whether or not you have retired or you plan to. In this article, we will discuss the exempt retirement accounts as well as those that are not.
Retirees Don’t Lose Everything
When you file for bankruptcy, you do not lose everything as bankruptcy exemptions such as equity can be used to protect your property (home, car, etc.). Retirement accounts, on the other hand, were made exempt from bankruptcy in 2005. This means that almost all pension plan funds and retirement accounts are exempt in bankruptcy.
For Chapter 7 bankruptcy, you have to give up property to be sold to pay your creditors but your retirement funds will still remain safe. With Chapter 13 bankruptcy, your retirement account balance will not affect the money you have to pay monthly in your repayment plan. Let’s take a look at the retirement accounts that are protected completely.
Retired Accounts Protected in Bankruptcy
Social Security Payments
In bankruptcy cases, social security payments are safe most times until it gets deposited into your bank account. Federal law does not allow money to be taken out of your social security payments before it is sent to you. But once it gets into your bank account, your creditors can take the money. For this reason, it is important to keep your social security payments in different accounts.
401(k) accounts are protected under the Internal Revenue Code.
Private Company Pensions
If a private company pension qualifies under the ERISA (Employment Retirement Income Security Act) of 1974, it will be protected from bankruptcy. There are several requirements that must be met before they qualify. On the other hand, government, non-profit organizations, and churches cannot qualify under ERISA. However, they can be exempt from bankruptcy if they meet the requirements of other Internal Revenue Code.
Over $1,200,000 are protected in Roth IRAs and this maximum amount increases every three years.
Other accounts protected in bankruptcy include:
- Defined Benefit Plans
- Money Purchase Plans
Retired Benefits not Exempted
Even though the money in your retirement account is exempt from creditors, the benefits paid to it are not. For Chapter 7 bankruptcy, the benefits can be taken to repay your creditors. Your retirement income will determine the amount of money from your benefits will be used to repay monthly for Chapter 13 bankruptcy.
If you are considering bankruptcy, but are afraid of what will happen to your nest egg, contact Elias Dsouza of Dsouza and Strachan Lawgroup Group. Elias has the knowledge and experience to get to financial freedom.