How Bankruptcy Affects Retirement Accounts
When considering bankruptcy, it is imperative to understand which assets are safe and which are not. For many individuals, retirement accounts are some of their more considerable assets. Fortunately, retirement savings are generally protected from bankruptcy. However, there are a few exceptions to this rule.
Understanding the bankruptcy rules regarding any pension or retirement account is essential, especially when filing for bankruptcy near or after retiring. Federal and state-specific laws and limitations dictate what assets you can keep in bankruptcy.
Understanding Bankruptcy and Retirement Savings
Bankruptcy is a powerful debt relief tool, with Chapter 7 and Chapter 13 bankruptcy being the most common options for individuals looking for a fresh start.
To qualify for Chapter 7 bankruptcy, you must pass the means test by showing that your income is below the median state income level or your disposable income is at or less than 25% of your unsecured debts. Qualifying individuals will get their non-exempt assets liquidated to pay off their unsecured debts.
The good news is that the means test doesn’t include your retirement accounts. However, if you are already receiving payments from your retirement account, they will be factored in as income.
Chapter 13 bankruptcy, on the other hand, restructures your debt and creates repayment plans for 3 to 5 years. While funds in your retirement accounts are exempted, if you are withdrawing retirement funds, they will be factored into your repayment plan.
Legal Protections for Retirement Accounts
Georgia bankruptcy exemptions under OCGA §44-13-100 limit certain assets from liquidation or distribution to repay creditors. These exemptions apply to certain types of retirement accounts. Depending on the account type, all or some of the funds may be protected in bankruptcy.
The Impact of Bankruptcy on Different Retirement Accounts
Filing bankruptcy can be the right choice when dealing with large debts that you are struggling to repay. The Bankruptcy Code protects most retirement accounts, so retirement savings can’t be used to pay off debts. The exemptions and limits, however, vary by account type.
ERISA-Qualified Retirement Accounts
Protection is limited to Employee Retirement Income Security Act (ERISA) qualified retirement accounts and pension plan funds. ERISA-qualified accounts protected during bankruptcy include:
- 401(k)s and 403(b)s
- Profit-sharing plans
- Money purchase plans
- Defined-benefit plans
- Keoghs (for self-employed individuals)
Non-ERISA Retirement Funds
Non-ERISA-qualified accounts are not protected from being used to pay creditors. Non-ERISA accounts include:
- General savings accounts
- Investment accounts
- Stock options
- Traditional IRA
- Roth IRA
The Nuances of Exemptions and Limitations
Traditional and Roth IRAs are protected up to a combined limit of $1,512,350. This means any amount above the $1.5 million cap can be used to repay creditors. The cap adjusts every three years for inflation and is set to adjust again in 2025.
Withdrawn retirement benefits are not exempted. Withdrawn funds lose exempt status during bankruptcy. Monthly payments from a pension received can be considered income.
Some employees and groups are eligible for unlimited retirement benefits exemption under the federal nonbankruptcy exemptions. Such employees and groups include:
- Railroad workers
- Civil service employees
- CIA employees
- Military service members
- Foreign service employees
Social Security Benefits
Social Security benefits must be kept in a separate account to be exempted from bankruptcy. These benefits are unlimitedly protected, regardless of their value. Your government benefits are also exempted. However, if you are receiving Social Security income, it will be included in your means test calculation or repayment plans.
Seeking professional advice can maximize the protection of your retirement accounts. A financial advisor can also help you develop a retirement plan that protects your funds in the event of bankruptcy.
How to File Bankruptcy
The general process to file bankruptcy is as follows:
- Hire a bankruptcy lawyer to help determine the type of bankruptcy that best suits your financial situation and needs.
- Complete a bankruptcy counseling course and obtain a certificate from an approved agency.
- Gather all required documents.
- Complete the bankruptcy petition and file with your bankruptcy court.
- Attend the Meeting of Creditors, also known as Meeting 341, where you answer the trustee’s and creditors’ questions under oath.
- Complete the Debtor Education Course. You will only be eligible for discharge with a completion certificate from a court-approved agency.
- Receive discharge.
Planning for the Future
The period after filing for bankruptcy is critical for rebuilding your financial situation. Some of the steps you can take post-bankruptcy to regain financial stability and freedom:
- Create a budget for monthly expenses, income, and debt payments. This will help you understand your financial situation and make informed decisions.
- Prioritize paying off outstanding debts to avoid accumulated and time-pressing collection actions.
- Keep an eye out for the warning signs of bankruptcy.
- Seek guidance from a financial advisor to help you create a personalized retirement plan.
Navigate Bankruptcy with Cherney Law Firm, LLC
Have you been saving money for retirement and want to protect it as you file for bankruptcy? At Cherney Law Firm, LLC, we provide quick and effective bankruptcy solutions tailored to your financial situation.
Attorney Matthew Cherney has a wealth of knowledge and experience navigating federal and state bankruptcy laws. He has represented thousands of clients filing bankruptcy, helping them reach their financial goals.
Contact our bankruptcy attorney in Marietta, GA, to schedule a free consultation today. Weekend and evening appointments are available.
Frequently Asked Questions
Can I Continue Contributing to My Retirement After Bankruptcy?
You can continue contributing money toward your retirement plans as you would before filing for bankruptcy. However, your ability to contribute towards retirement accounts may depend on the type of bankruptcy filed and whether the contributions are voluntary or mandatory.
How Can I Avoid Risking My Retirement Savings in the Future?
Protect retirement savings from future financial challenges by:
- Use ERISA-qualified retirement accounts.
- Keep your retirement savings and Social Security benefits in separate accounts.
- Don’t take out your retirement savings before or during the bankruptcy process.