CAN YOU LOSE YOUR IRA, 401(K) RETIREMENT OR PENSION ACCOUNTS IF YOU FILE BANKRUPTCY?

If you’ve spent years saving and building up your retirement, figuring out whether you’ll be able to keep it is probably a paramount concern when considering filing for bankruptcy. In Ch. 7 bankruptcy, any assets that are not exempt (or protected) will be sold off or liquidated by the Ch. 7 trustee to repay your creditors with some of that money. What you need to know is whether your retirement savings are exempt or not.

The answer depends on a few variables.

  • What type of account is your retirement savings in?

To understand how bankruptcy affects your retirement statements, you’ll first need to understand the different categories of savings accounts.

Social Security

Social security payments, for example, are safe in bankruptcy until they reach your bank account. Non-retirement accounts are not exempt from bankruptcy in Florida, so while the Ch. 7 Trustee cannot garnish or take away your social security benefits or income, he or she may be able to take the money once it is in your account and mixed or “commingled” with other funds.

Can this money be protected once it’s in the bank account?

Yes. If you maintain an account whose only funds are sourced from your Social Security benefits or income and every dollar can be traced to a benefits deposit from the government, then the money in the account should be exempt. Based on your specific situation, your bankruptcy attorney can advise you on how to best protect your social security income.

Pensions, IRAs, 401(k)s, and HSA Accounts

People considering filing for bankruptcy often have questions about what will happen to their pension. If you have a private employer pension, the funds are protected by the Employment Retirement Income Security Act of 1974. (ERISA). Plans must adhere to strict guidelines. Furthermore, ERISA does not apply to pensions paid to employees of churches, non-profit organizations, or governments. Speak with your attorney about how to use these safeguards and what you should do if you worked for an employer that is not covered by ERISA. Visit the U.S. Department of Labor’s website to learn more about ERISA protections.

Also, private retirement accounts such as 401(k) accounts and traditional and Roth IRAs are exempt and shielded from the bankruptcy trustee. Florida and Bankruptcy laws safeguard all funds in 401(k)s, Individual Retirement Accounts (IRAs), and Health Savings Accounts (HSAs).

Call us to speak with a Florida bankruptcy attorney who can explain in detail how your retirement savings can be protected from the Bankruptcy Trustee or Creditors.

Have you been making extraordinary deposits or contributions to your retirement account?

Another issue that arises from time-to-time is an extraordinary or unusually high amount of transfers, deposits, or contributions in to an exempt retirement account by an insolvent debtor. For example, if you increase your 401(k) contributions to something higher than approximately 5% of your income and are regularly shifting your income to your retirement savings in the months leading up to your bankruptcy filing, the Bankruptcy Court or Trustee will look at that as an improper attempt to convert non-exempt assets to exempt assets. In Ch. 7, the Trustee may force a turnover of the excessive contributions or move to deny your discharge. In a Ch. 13 bankruptcy, the Trustee may require you to increase your plan payments so that your creditors get back the equivalent of the over payments, making your Ch. 13 reorganization plan less affordable.

Do Not Deplete Your Retirement Accounts to Avoid or Delay Bankruptcy

Some people use their retirement funds to pay off debt and avoid bankruptcy. This may appear to be a good idea at the time, but it will cost you in the long run. Bankruptcy laws safeguard retirement funds and it’s not a financially sound decision to use those funds to pay off debts that could have been discharged in bankruptcy. On top of that, early withdrawal of retirement funds results in a stiff tax penalty, only adding to the total amount of debt you may end up paying. Often times, that IRS debt could approach the original amount of debt you were trying to pay off in the first place.

Before you make any decision relating to debt and your retirement savings, you should consult with an experienced bankruptcy attorney. The liquidation of assets in bankruptcy puts your assets at risk. It is critical to seek the advice of a professional. Our attorneys provide the quality, value, professionalism, and responsiveness you need to make the right decision at the right time. Call us now for a free consultation.

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