Filing for bankruptcy often raises several concerns including credit implications, your financial future, and wage garnishment. But what about your retirement? Can filing for bankruptcy affect your golden years? If you’re considering filing for bankruptcy, you’ll want to keep reading to determine its potential impact on you and your financial well-being later in life.
Recent Bankruptcy Reform Laws
Filing for Chapter 7 or Chapter 13 bankruptcy should not affect your pension or retirement accounts. Things have changed in the last decade as Congress reformed laws regarding bankruptcy in 2005. These bankruptcy reforms include further protection for pensions and retirement plans. As a result, nearly all retirement funds are protected from seizure on the part of creditors. This reform applies to both Chapter 7 and Chapter 13 bankruptcy filings.
Thus, if you have a 401(k), 403(b), or Keogh, you funds should be protected. This reform also extends to defined-benefit plans, profit-sharing plans and money purchase plans. Matters get a little more complicated with IRAs and Roth IRAs. $1,283,025 are exempt from creditors per person. (This amount applies to the combined total of funds in all of your retirement accounts.) If you have an excess of $1,283,025 in your accounts, your creditors will have access to the extra funds.
A Word on Retirement Benefits Received as Income
It’s important to understand that any retirement benefits you receive as income are accessible to creditors. If you file for bankruptcy and the courts find that you have excess income over what you need for living expenses, they could potentially take these benefits to pay off your debt. This rule applies to both Chapter 7 and Chapter 13 bankruptcy. In the case of Chapter 13 bankruptcy, this “excess income” will be included in your repayment plan.
Social Security and Disability Income
Creditors can not legally garnish your wages without having won a lawsuit against you. Generally, you’ll find that any disability and Social Security income should be protected from garnishment. In 2011 the law was updated to protect two months of benefits from garnishment. Typically, your best bet is to have this money deposited in a different account to protect your assets.
Withdrawing Income from Your Retirement Account
To protect your assets, you might be considering withdrawing funds from your retirement accounts. However, remember, that you’ll often receive penalties and taxes to go along with your withdrawal especially if you have not yet met the age requirements. Most financial institutions want to discourage individuals from cashing out early.
You’ll find that in majority of bankruptcy cases your retirement accounts are protected from access to creditors, and there’s really no reason to make withdrawals ahead of time. Making withdrawals from retirement accounts also rids you of the advantages and protections found with such accounts. Once removed from a retirement account and placed in another account, these funds now lose the exemptions and protections they were once afforded.
Determining If Bankruptcy Makes Sense for You
For seniors swamped in credit card debt, medical bills, and other debt, bankruptcy can provide the path to a firmer financial ground. However, it’s critical to determine whether you actually have anything worth relinquishing to creditors before choosing to file for bankruptcy. Even if you’re a long way away from retirement, you’ll still want to protect the assets you’ve worked hard to attain. To determine if bankruptcy is the best option for you, contact us for a free consultation.