If you’re struggling with outstanding debt and are considering bankruptcy, it’s important to understand how the process may affect, or be affected by, your retirement plans. Having an understanding of how your retirement may be impacted by a bankruptcy filing can help you determine the best way forward. You may even find that bankruptcy is a tool you need to reach financial freedom.
Our Brownsville bankruptcy attorney at the Law Offices of Phillippe and Associates can help you understand the details of how bankruptcy and retirement interact, but you can also read below for a general overview.
Exemptions for Retirement Accounts
Some types of retirement accounts are usually exempt in their entirety. There are some exceptions, but the following ERISA–short for Employment Retirement Security Act of 1974–qualified pension plans are generally exempt from liquidation:
- Profit-sharing plans
- IRAs (see the section below on limitations)
- Defined-benefit plans
- Money purchase plans
It’s worth noting that non-ERISA-qualified plans aren’t likely to be protected.
Chapter 7, Chapter 13, and Retirement
Your retirement funds may have a different effect on your bankruptcy proceeding depending on the chapter that you file.
Chapter 7 bankruptcy is the type of filing most likely to result in the liquidation of your property. However, your retirement funds are protected federally and are covered under some state-specific exemptions as well.
Chapter 13 involves creating a repayment plan for compensating your creditors. Your debts may be reduced or discharged, and you are likely to establish lower monthly payments if your bankruptcy filing is successful. These amounts can be affected by your assets as well as your debts. The good news is, your retirement fund is unlikely to affect the amounts you will have to repay.
Limitations for Traditional and Roth IRAs
As mentioned above, there are limitations on the amount that is exempt for Roth IRAs and Traditional IRAs. Each filing debtor is allowed to retain $1,362,800 in total from these sorts of plans. This amount is the total that can be exempted from these accounts, not the amount that can be retained per account.
This exemption limit is adjusted every three years. The last adjustment was made in 2019 and the next is scheduled for 2022.
Non-Exempt Benefits After Retirement
While your retirement accounts are largely exempt, any retirement benefits paid out as income aren’t likely to be protected. These funds may also affect your ability to qualify for Chapter 7 protection via the means test. The Chapter 7 process isn’t allowed to seize benefits that you use to live, but anything beyond what is necessary for that support may be subject to seizure. These benefits may also affect the amount you are required to repay through your Chapter 13 repayment plan.
Social security benefits cannot be garnished as a part of the bankruptcy process, but the government may take funds out of these benefits to cover federal taxes and federal debts including court-ordered restitution, alimony or child support, and student loans. Once the money has entered your account, however, it may be available for seizure by creditors.