What Happens to Retirement Savings in Bankruptcy?

You’ve played by the rules all your life, and yet you still manage to find yourself facing bankruptcy proceedings.  It’s a lot to swallow, and one of your biggest concerns is your financial security in your golden years. Does filing for bankruptcy mean you will never get to enjoy the retirement savings you so carefully put away for your old age? Good news! Retirement savings are generally protected, regardless of whether you file for Chapter 7 or Chapter 13 bankruptcy!

Which Accounts are Protected? 

Thanks to congressional action back in 2005, debtors may enjoy fundamental protections for their retirement accounts that are qualified as ERISA, which includes:

• Defined-benefit retirement plans;
• Keogh plans;
• Roth, SIMPLE, and SEP IRAs;
• 401(k) plans;
• Many 403 (b) plans;
• Profit sharing;
• Flexible spending accounts;
• Money purchase plans.

Limits to Consider

It may sound simple– but there are details you should know:

• Worth noting is that although the money held in a retirement account is not accessible to creditors, benefits that are collected as income are not exempt. Now, if those benefits are essential for your support, the court can’t touch them–but if you are getting money beyond what is required for your support–what’s considered disposable income– you may wind up having to turn it over to pay off creditors.
• Another important point: IRA and Roth IRAs are limited in the amount of money that can be protected. Anything beyond the $1,512,350 mark–whether in a single account or multiple ones–is fair game for the bankruptcy court to access on behalf of creditors.
• Money in your 401(k) can also be seized in three qualifying events\

1. If someone successfully files a qualified domestic relations order against you;
2. If you owe unpaid income taxes.
3. If you have fines and/or penalties resulting from a criminal prosecution.

Don’t Make This Mistake

What it all boils down to is that most retirement savings are protected from creditors when filing for bankruptcy, although the rules have notable caveats, making it very helpful to have an experienced bankruptcy attorney helping you from the word go. In fact, one mistake some people make is to drain their retirement accounts in order to pay down debt before even considering filing for bankruptcy, which is a huge no no!  Those funds are the result of years of sacrifice and work. They represent a nest egg that is supposed to take care of you in your golden years. Since those funds are essentially protected in bankruptcy, don’t throw them away when you could continue to rely on them down the road. 

The Guidance You Need 

The experienced Miami bankruptcy attorneys at The Law Office of Julia Kefalinos understand how confusing this all is, and are prepared to answer your questions and guide you to the best possible outcomes. Schedule a confidential consultation in our Miami office today.

Source:

bankrate.com/personal-finance/debt/401k-safe-bankruptcy/