Many people fear filing for bankruptcy, thinking that their retirement accounts might be compromised in the bankruptcy process. However, in the overwhelming majority of cases, your retirement accounts are legally protected from creditors during a bankruptcy case. Continue reading to know more about how retirement accounts are exempt in bankruptcy cases and what the limitations are.
Since Congress brought changes to the bankruptcy laws in 2005, virtually all ERISA-qualified retirement accounts and pension plan funds are exempt from creditors, including 401(k) accounts. With that being said, it would still be a good idea to check with your employer whether 401(k) is ERISA qualified before filing for bankruptcy.
Chapter 13 Bankruptcy
In Chapter 13 Bankruptcy, your assets are not liquidated, but instead, they are used in judging your ability to pay back your creditors during the court-approved three- to five-year repayment plan. Is the balance in your retirement accounts used in their judgment? The answer is no. All ERISA-qualified retirement accounts are exempt from the judgment, and the balance in them does not affect how much you have to pay in your repayment plan.
Limitations on Legal Protection
Even though your retirement funds are exempt from bankruptcy, there are still a few limitations you should be aware of.
Withdrawn Retirement Benefits
If you withdraw money from your retirement account and use it to purchase an asset or transfer it to a regular account, that amount would no longer be considered protected, and will be used up in your bankruptcy case. Additionally, the monthly payment you receive from it will be figured into your means test qualification in case of Chapter 7 bankruptcy or what portion of your unsecured debts you must repay in case of Chapter 13 bankruptcy.
For both IRAs and Roth IRAs, the exempted amount is limited to $1,362,800 per person. If you have more than this in your retirement accounts, the excess funds may be taken by the bankruptcy court to pay back creditors. To account for changes in living expenses, the exempt limit is adjusted every three years, and the next time it will be so is in 2022.
It is essential to know that general savings accounts, investment accounts, and stock option plans are not considered as retirement accounts, and thus, would not be afforded protection during the bankruptcy process. Additionally, if the court deems your retirement account to be fraudulent, it would be disqualified from legal protection.
Are you considering filing for bankruptcy and in need of legal assistance? Book an appointment online or call at 512-640-3340 for a free consultation with a seasoned attorney at the Law Offices of Sean T. Flynn.