The Truth About Bankruptcy and Retirement Accounts

When facing the prospect of filing for bankruptcy, many people will do whatever they can to delay or avoid this fate. This could mean liquidating assets or using any property available and whatever cash is accessible.

The question that frequently arises is whether or not you should resort to tapping into retirement savings in order to avoid bankruptcy. How should the thousands of dollars you’ve saved in a retirement plan affect your decision either to file or not to file?

Is Your Retirement Account ERISA Qualified?

ERISA refers to the Employee Retirement Income Security Act of 1974. This act, as explained by the Department of Labor (DOL), was enacted to protect the assets of Americans. If the retirement plan is ERISA qualified, this means that you are guaranteed to receive payment.

According to the DOL, employers are not required to establish a pension plan, but if they do, those plans must meet the minimum standards set forth by this act. The majority of the provisions of ERISA apply to qualifying retirement plans that were established on January 1, 1975 or after this date.

What Does This Mean for My Bankruptcy Filing?

The protection provided by the ERISA applies even during bankruptcy. This means that creditors would not have access to the assets saved within your retirement account even if you file a Chapter 7 bankruptcy. You could potentially have your debt erased, while still holding on to the money guaranteed by your retirement plan.

Confirming Your Funds Are Protected

While most IRAs and other retirement plans are protected under the Employee Retirement Income Security Act, it is important to confirm that yours is protected before making any decisions because there are circumstances under which your account may not qualify.

Under ERISA, the plans are required to provide you with important information regarding features and funding. You can request this information from your employer or directly from the institution through which you have your retirement account. If you are not completely sure whether or not your retirement account is protected under the ERISA, consult with a bankruptcy lawyer.

Should I Use My Retirement Account to Avoid Bankruptcy?

In most cases, the answer is probably no.

If you are in such a dire situation that you need to drain your retirement account, filing for bankruptcy is often the more favorable solution.

In many cases, using money from a retirement account only delays the inevitable, and individuals eventually file for bankruptcy anyway. In this event, they find themselves filing for bankruptcy and they no longer have a retirement account.

If the retirement account is guaranteed, filing earlier will allow you to have a fresh start and begin rebuilding credit sooner, and the retirement account will still be available as a financial safety net for the future. Thanks to the ERISA protections, your retirement account will still be there in its entirety, even after creditors have taken other assets and debt has been wiped away.

Developing a Smart Plan for Bankruptcy

Every choice you make during this time will have a major impact on your future. In order to determine when or if you should file, or whether or not your retirement funds are protected, your best option is to consult with one of our qualified and experienced bankruptcy attorneys.

It is never too early to have that initial conversation, as there is a chance that these professionals may be able to help you avoid bankruptcy altogether, or help you execute the process in a way that allows you to save as many of your assets and as much of your credit as possible, getting you on the road to rebuilding very quickly.