Additional Retirement Account Protections
If your retirement plan is included in the bankruptcy estate, federal and state laws provide exemptions to protect your account in bankruptcy. Regardless of which state you live in, federal law protects all retirement accounts that are exempt from taxation under certain sections of the Internal Revenue Code. Funds in non-ERISA plans like IRAs are protected up to $1,362,800 per person total under federal law. .) This figure is current as of April 1, 2019, and will change again on April 1, 2022.
Learn more about federal bankruptcy exemptions. Most states have their own exemptions that cover retirement accounts in bankruptcy, as well.
When Is a Retirement Account Not Protected?
As discussed, your 401k and other retirement accounts are typically safe in bankruptcy. However, if you withdraw money from your retirement account and purchase other assets or place the money in a regular bank account before filing your case, it won’t receive the special protections afforded to retirement funds. In addition, if your retirement plan is fraudulent or otherwise not a legitimate retirement account, it won’t be protected in bankruptcy.
What You Can Do
Money held in qualified retirement plans such as 401s and pension plans are for the most part protected from creditors, while traditional and Roth IRAs are protected under federal bankruptcy law. To ensure that a rollover from a qualified retirement plan into an IRA receives full exemption in a bankruptcy proceeding, it helps to create a separate account just for those assets.
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Retiring With Debt 5 Reasons To File Bankruptcy Now
As you head toward retirement, you may worry like many Americans that you’re not in the best financial position to retire. While many people assume they can continue working, things like late-career layoffs or health problems may force you to retire before you can really afford to.
In this case, getting rid of debt can be an important way to ensure you can afford to live in retirement. And bankruptcy is the legal tool designed to permanently rid you of your debt burden, no matter what your age or career prospects. But should bankruptcy be part of your retirement plan? The answer may be yes. Here are five reasons to consider this step before you pull the plug on your work life.
1. Retirement Savings Are Exempt
Most Americans with some retirement savings should not worry about losing this money. Bankruptcy law exempts retirement accounts such as a 401, IRA, Roth IRA, or profit-sharing plan from being used to satisfy old debts. Your expected Social Security funds are also not open for debtors. However, these rules change once you start drawing on this money.
2. You Can Continue Contributing
There is good news for those who want to save for imminent retirement while ridding themselves of old debts. You can often continue to make contributions to your retirement accounts even while completing both a Chapter 7 and Chapter 13 bankruptcy.
3. Bankruptcy Later Is Tricky
4. Old Debts Can Threaten Future Funds
5. You Get a Fresh Start
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What If You Borrowed Against A 401 Savings Plan
Its possible to take out a loan against your 401 savings and many people who are struggling financially and trying to avoid bankruptcy do so. Its common for someone filing for bankruptcy to have questions about a 401 loan.
401 loans are not dischargeable in bankruptcy and are not considered regular debt. In a way, you are the creditor because youre borrowing your own money. However, you still need to repay the loan once your bankruptcy is complete.
Furthermore, you cannot use any assets liquidated in a Chapter 7 bankruptcy to repay the loan against your 401, nor is the loan part of your repayment plan in Chapter 13. Most of the time you are still permitted to make automatic payments toward the loan during Chapter 13, but this is determined on a case by case basis.
Continuing to repay the loan during bankruptcy allows you to keep from falling behind on your end goals for retirement, even if your 401 loan repayment cant be part of the overall Chapter 13 plan.
Consult With A Los Angeles Bankruptcy Attorney At Oaktree Law
Specializing in bankruptcy law and helping clients improve their financial situations, the attorneys at OakTree Law can help you navigate the bankruptcy process and avoid some of its risks. They can also guide you in making the right decisions, from avoiding certain actions to determining the type of bankruptcy that is best for you. In some cases, other options and alternatives may be explored. Call for a free evaluation.
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Are The Funds Safe
How safe your retirement fund is will depend on the type of bankruptcy filed. If you file for Chapter 13, you can rest easy. Your debt will be paid out of your disposable income over 3 to 5 years, and you get to keep all your property. That means that all your savings are safe.
If you file for Chapter 7, your 401 is safe if it is a plan that is qualified under the Employee Retirement Income Security Act. Most plans that your employer pays into qualify for this act, but you might want to ask your employer to make sure. These types of plans have transfer restrictions that can keep it out of the fund that your trustee can sell off to pay off your debt, and the courts have ruled that these transfer restrictions still apply during a bankruptcy. Any money that is in your 401 is safe under this rule. An experienced bankruptcy attorney will be able to know if the 401 is protected like this. For most Minnesotans, their 401 are protected.
Can Creditors Touch My Retirement & 401k Funds
Most of your retirement funds such as 401ks and other qualified retirement accounts are protected from creditors and untouchable by a bankruptcy trustee. Since these funds are protected by federal bankruptcy laws, it is rarely a good idea to cash in your retirement accounts to pay off your debts.
In aChapter 7 bankruptcy, most retirement accounts are classified as exemptions under the Bankruptcy Code. That means these accounts cannot be liquidated to pay your creditors. UnderChapter 13 bankruptcy, none of your assets are taken from you. The monthly repayment plan amount is determined by your income. Your retirement savings are only included in this amount if you want them to be.
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Can My Retirement Account Protection Be Lost
Yes, there are some situations that can put your retirement account at risk.
Withdrawing Funds
Retirement accounts are only protected if it used as an account for later on. So, if you have taken money out of your retirement account recently, it might not continue to be protected.
In some cases, this money is distributed.
This money would be seen as a part of your eligible âbankruptcy estate.â The Trustee could sell it to repay your creditors.
Penalties for Early Withdrawal
Any time you are taking funds out of a retirement account prior to your age of retirement, these disbursements are subject to penalties which can be significant.
For many qualified retirement accounts it is not uncommon to incur 10% penalty for an early withdrawal, and the funds will be taxed as gross income if you withdraw before the minimum age. Remember that one of the main benefits to retirement accounts is that they allow you to contribute money before it is taxed. So long as you do not remove the funds prior to the allowable age, you can utilize all the funds.
Withdrawing funds early can significantly reduce the amount of value in your retirement account. Money that just sits there is protected and will continue to grow. Money that is removed is reduced by fines and loses its protected status.
Preferential Transfers
S And Other Retirement Accounts In Bankruptcy
The purpose of bankruptcy law is to help get filers back on their feet financially, not to make life more difficult. So filers aren’t stripped of all belongings. Filers keep the things needed to maintain a home and employment.
But that’s not all. Filers can also keep most tax-exempt retirement accounts, including 401s, 403s, profit-sharing and money purchase plans, IRAs, and defined-benefit plans. However, traditional and Roth IRA protection is capped at a combined total of $1,512,350 (for cases filed between April 1, 2022, and March 31, 2025. These protections apply in both Chapters 7 and 13.
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Should You Use A 401 Loan To Pay Off Debt
So is it even a good idea to use a loan against your retirement savings to pay off debt?
Probably not. Especially not if it wont completely eliminate all of your debt.
The primary reason for this is because any money taken from your retirement savings is no longer eligible for protection under bankruptcy. The money can also be used against you when it comes to the bankruptcy MEANS test. Its possible someone who qualified for Chapter 7 debt discharge would be unqualified based on the money borrowed from their 401.
Its also important to remember that if you borrowed against your retirement savings and chose to pay off the loan right before filing for bankruptcy, your trustee could undo the transfer and use that money to pay other creditors. Repaying the loan is essentially repaying yourself and some trustees are going to view that as a lower priority debt than your other creditors.
The key to a successful bankruptcy is to understand your options and be informed enough to make the best choice based on your circumstances. The last thing you want to do is misuse your retirement savings and create lifelong problems for yourself financially.
If you have questions about your 401 and bankruptcy, or you have a 401 loan and you arent sure how it will be affected by bankruptcy, we can help. Contact the Law Office of Robert M. Geller at 813.254.5696 to schedule a consultation.
What Not To Do With Your 401k During Bankruptcy
Its a general rule of thumb that you dont touch your retirement account until youve reached a certain age. However, when youre struggling to stay afloat financially and bankruptcy is your only option, then draining your 401 may sound like a good plan. Although its an alluring idea, its incredibly important you dont make any rash decisions regarding your 401 before speaking to an experienced bankruptcy attorney. Creditors may be able to access your 401 funds if you make the drastic decision to access your retirement account.
Some of the most common mistakes people make regarding their 401 during bankruptcy include the following:
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Will I Lose My Retirement If I File Bankruptcy
Chapter 13 bankruptcy you repay your creditors through a 3 or 5 year repayment plan.
The trustee in a chapter 13 case does not look for any of your property that he can sell for the benefit of the creditors, so your retirement would be safe in a chapter 13.
Chapter 7 bankruptcy case, the trustee is looking for non-exempt property he can collect for the benefit of your creditors.
Fortunately, bankruptcy filers in Kansas and Missouri do not have to worry about losing their 401k, IRA, Roth IRA, pensions, or other qualified retirement accounts even if they file a chapter 7 bankruptcy. Qualified retirement accounts are exempt property in Kansas and Missouri.
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Things That Will Endanger Your 401
There are a few things that can threaten your 401 One thing to remember is that the moment any funds from the 401 go in another, non-exempt, account, they lose the protection of the ERISA and other federal exemptions. It is best to leave alone any money that you have in your 401.
On the other hand, moving assets into your 401 right before you declare bankruptcy can look like fraud to your trustee, and your account can lose its exempt status if the trustee convinces the court that you are interfering with the bankruptcy process or trying to do something underhanded. It is a good idea to talk to your lawyer before making any transfers into or out of a 401
It should also be added that the exemptions generally apply to the individuals who earned the money in the account. According the 2018Lerbakken v. Sieloffand Associates case, the exemptions arent transferred with the money should you have part of someone elses 401 transferred to you.
Bankruptcy is complex, and expert legal help is critical to making it work for you. Contact Walker & Walker Law Offices, PLLC for more information.
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You Must Pay All Disposable Income Into A Repayment Plan
When you file for Chapter 13 bankruptcy, you propose a plan to pay back all or a portion of your debts. How much you’ll pay back will depend on your income, expenses, assets, and debt type. The “best effort” rule requires you to contribute all of your disposable income to your Chapter 13 repayment plan for the benefit of your unsecured creditors.
So what is disposable income? It’s any income left over after paying all expenses reasonably necessary to support you and your dependents. Of course, having unreasonably high expenses won’t get you out of paying creditors. The bankruptcy rules determine what are reasonable. Your plan won’t be determined by your actual costs.
Benefits Of Filing Bankruptcy
The primary benefit of filing bankruptcy is that it gives you a plan for eliminating your debts. If you file Chapter 7, you can discharge any amount of secured or unsecured debt and be debt-free within a matter of months. If you file Chapter 13, you get more time to pay down your debts and you don’t risk losing any of your assets to the bankruptcy court. Filing bankruptcy also enforces an automatic stay against your creditors, which means they can’t attempt to sue you, garnish your wages, put liens on your property or seize your bank account until your case is resolved.
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Is Your 401 Protected If Your Employer Goes Out Of Business
If you invest in your companys 401 plan, you know that your pre-tax savings comes out of your paycheck each period and is invested in one or more investment vehicles, usually mutual funds. But you may wonder if your employer ever sees any of that money, other than any contribution it may provide. Very simply, your employer is not legally allowed to hold your 401 money. Under federal law, all 401 money must be held in a trust or in an insurance contract thats separate from your employers assets. Therefore, neither your employer nor any of your employers creditors can grab that 401 money.
That said, there are certain circumstances in which you may not receive all the funds you expected if your employer goes out of business.
Florida Exemptions Protect 401ks
Some states allow those who declare bankruptcy to choose between exemptions established under federal law and those established under state law. But in Florida, you must use the Florida exemptions if you qualify.
Section 222.21 of the Florida statutes is clear that no matter what federal law says, 401ks are exempt. For that matter so many other types of retirement accounts such as 403b accounts, SEP and simple IRAs, inherited IRAs and Roth IRAs among others.
Though all tax-deferred retirement plans are protected under the above section of Florida law, other sections of the law specifically mention exemptions for pension plans for teachers, police officers, firefighters, county officers and employees, and state officers and employees.
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What To Know Before Filing For Bankruptcy
As a fallout of your bankruptcy filing, your for a 10-year period if it is a Chapter 7 bankruptcy, and a seven-year period for a Chapter 13 bankruptcy.
Even though you are not legally required to hire a lawyer to handle your bankruptcy, it may be in your best interest to do so. You may even be able to find free legal services.
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Whether You Can Make 401 Or Other Voluntary Retirement Contributions During Chapter 13 Bankruptcy Depends On Your Bankruptcy Court And Your Individual Situation
Updated By Cara O’Neill, Attorney
In Chapter 13 bankruptcy, 401 or other voluntary retirement contributions reduce the amount creditors receive through your repayment plan, so most jurisdictions don’t allow them. Some, however, might approve contributions if you’re approaching retirement age and the contributions are reasonable and necessary. Read on to learn more about whether you can make 401 or other voluntary retirement contributions during Chapter 13 bankruptcy.
When Can My 401 Be In Danger
While creditors and bankruptcy trustees cannot touch your 401, per the ERISAs anti-alienation clause, the federal government can. The Internal Revenue Service can seize your funds if you have an unpaid tax assessment or a federal tax levy is enforced. Your assets can also be distributed to an ex-spouse by court order.
One reason not to move funds from your 401 into another account before filing for bankruptcy is you will lose federal protections. And moving assets into your retirement account may appear as fraud. The trustee may then claim youre interfering with the bankruptcy process, defrauding a creditor, or otherwise being untrustworthy, which can lead the court to dismissing your case. Withdrawing money to pay just one creditor is a bad idea too this may be considered whats called a preferential transfer. Its therefore best to talk to a bankruptcy attorney before doing anything with your account.
In addition, your money may be at risk if you transfer it from a retirement account into a regular bank account just before your bankruptcy case begins. Any assets you purchase with 401 funds may also become part of the bankruptcy estate.
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