State Vs Federal Bankruptcy Exemptions
The retirement exemptions are part of the federal bankruptcy exemptions. States can “opt-in” and use the federal bankruptcy exemptions or “opt-out” and use their own state exemptions.
However, federal law affords equal treatment of exemption claims of retirement funds to all Chapter 7 and Chapter 13 bankruptcy filers. Therefore, whether you live in an opt-in state or an opt-out state, the federal retirement bankruptcy exemptions apply to your bankruptcy case. For all other property, it’s important to know whether the federal or state exemptions will apply.
Find out more in Bankruptcy Exemptions.
Chapter 1: Retirement Accounts Are Safe
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What Are Chapter 7 Bankruptcy Exemptions
The purpose of bankruptcy is to help people get back on their feet and regain control of their financial situation. In order to help with this process, the government created a set of exemptions to help individuals maintain their quality of life, while still resolving their issues with creditors.
If your property is âexemptâ you get to keep that property. If a property is not exempt, then your bankruptcy trustee can sell it and divide the profit among your unsecured creditors.
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Not Consulting An Attorney
Bankruptcy law is too complicated for the average consumer to understand. Bankruptcy attorneys know all the subtleties, which might escape uninformed people. Example: If you have a child with a part-time job while still living with you and being claimed as a dependent their earnings must be counted toward household income. Attorneys should know legal ways to protect assets that could be at risk. It might be tempting to save money in this do-it-yourself era, but its probably not worth the trouble or risk. In 2017, people representing themselves succeeded only about 5% of the time in bankruptcy filings. An attorney can help you determine which bankruptcy is best for you: Chapter 7 or Chapter 13.
Protecting Your Home Equity
Your home equity is one of your most important retirement assets, so it’s essential to consider how to protect it if you’re filing for bankruptcy.
Suppose you have $50,000 in credit card debt. If you file a bankruptcy case, the court will typically want you to turn over enough property to pay that debt. Even though you owe $50,000, you may not have to pay that entire amount.
Before you pay the debt, your creditor must file a claim, which must follow certain requirements, or the trustee appointed by the court to administer your case can object to the claim and possibly have it thrown out.
Some creditors won’t bother to file a claim. And any claim that isnt filed or allowed by the court will be discharged. Theres a chance you’ll pay less than $50,000 on the credit card debt.
In some cases, you’ll have to give up your house, which the trustee would then sell to pay off the debt, the trustee’s commission, and all the allowed claims. The court will then refund you anything left over.
Instead of selling your home, you could offer to substitute other nonexempt properties or cash to preserve your house and most of your equity.
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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
Is An Ira Protected From Bankruptcy
While federal bankruptcy laws have long protected 401 plans, pensions, and similar employer-sponsored, qualified retirement plans, IRAs only came under federal protection with the enactment of BAPCPA. Among a wide variety of bankruptcy reforms, including heightened requirements for filing bankruptcy under Chapter 7, BAPCPA introduced the first explicit federal bankruptcy protections for assets held in IRAs.
Before BAPCPA, IRA protections were defined at the state level, or not at all. After BAPCPA, bankruptcy protection for IRA assets is afforded to citizens in all states.
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How To File For Bankruptcy
Your first step in filing for bankruptcy should be to consult with an attorney who can advise you on whether that’s the right choice, and also, to let you know which chapter of bankruptcy is most suitable for you. From there, you’ll need to gather certain documentation to help your attorney make that determination, such as:
- Recent tax returns
- Pay stubs or proof of income over the past six months
- Bank account statements
- Alimony payments
- Debts resulting from you breaking the law, such as overdue fines
Also, filing for bankruptcy won’t prevent you from losing your home if you’re unable to get current on your mortgage payments and keep up with your future payments.
If A Company Goes Bankrupt What Happens To My 401
Can a company take your 401 money? Generally, no. In addition to protecting your retirement savings in bankruptcy, the ERISA is a federal law that requires retirement plan assets to be held in a trust account, apart from an employers other business assets. Therefore, a partition is created which results in employers being prohibited from accessing 401 savings funds for their business operations, including the payment of creditors in the event that the company declares bankruptcy.
Experts do warn of two circumstances where the employer may fail to pay all the money entitled to you in your 401. The first circumstance could occur if the employer didnt deposit your contributions before declaring bankruptcy, which is usually limited to a pay periods worth of contributions. The second circumstance is when an employer match hasnt been deposited into the trust fund, which could be a larger amount of money routinely matched monthly or even yearly. If the employer hasnt made its matching contribution to the plan before bankruptcy, the employers match to your 401 could be lost.
As you can see, the answer to the question of what happens to my 401 if my company goes bankrupt depends to some extent on the practices of each employer, but employees can check their pay stubs to familiarize themselves with how the contributions are made and ask an HR representative when the matches occur. Where possible, choose a responsible employer who handles this area with care!
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Keeping Your Car In Chapter 7 Bankruptcy: Reaffirmation Agreements
Another question you may have about bankruptcy is if you can keep your car in a Georgia Chapter 7 bankruptcy. The answer is yes. In a Chapter 7 bankruptcy, you can keep normally keep your car. If you own your car outright, then you will have to make sure that you have enough exemptions to protect the vehicle from sale by the trustee.
In Georgia, the exemption for a car is $3,500 per debtor. If your car is worth more than $3,500, there is a possibility that you can apply an additional $5,600 exemption to keep your car in bankruptcy. If you have a car loan, you must keep your payments current in order to keep your car in bankruptcy. You may also be required to sign what is called a reaffirmation agreement to keep your car in bankruptcy. A reaffirmation agreement requires you to keep continue to be obligated to your car creditor, even after the bankruptcy case is closed.
Other 401k Loan Considerations
While a 401k loan can be an easy and convenient way to obtain money, it also has drawbacks. When you take out a 401k loan, that money no longer earns a return, other than the percentage you pay yourself over time. Also, not paying back your loan can result in hefty penalties and adverse tax consequences. Consider talking to a financial advisor and evaluating other alternatives before borrowing against your 401k.
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Can My 401 Be Taken In Bankruptcy
ERISA-qualified plans are for the most part protected from start to finish during bankruptcy, including from creditor claims, bankruptcy proceedings, and court judgments.
This follows a change to the Bankruptcy Code enacted by the federal Congress in 2005, which declares that any ERISA retirement accounts shall be fully-protected and excluded from the bankruptcy estate, including 401 plans, 403 plans, Roth and other IRAs, Keough plans, profit-sharing plans, money-purchase plans, and defined-benefit plans.
Chapter 13 Bankruptcy And Your 401
In Chapter 13 bankruptcy, sometimes called reorganization bankruptcy, you are allowed to keep your property and pay off some or all of your debts through a three-to-five-year structured repayment plan. In a Chapter 13 bankruptcy, you also get to keep your 401 and other ERISA-qualified plans.
So, if you file bankruptcy can you keep your 401 under Chapter 13? Are IRAs exempt from bankruptcy under Chapter 13? Yes! Because you get to keep your property in Chapter 13 bankruptcy, your 401, IRAs, and other tax-exempt retirement plans are protected, and you do not need to consider cash out retirement during Chapter 13 as these monies will remain safe.
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Ohio Bankruptcy Exemptions Attorney In Cincinnati
Handling debt is always a sticky situation, especially when you lack the means to fulfill your payment obligation. Filing for bankruptcy can grant you a new start and allow you to still save your retirement accounts such as your 401. However, its important you understand the process thoroughly before you make any serious decisions. For skilled counsel with extensive experience in bankruptcy law we suggest you contact Steiden Law Offices.
Eric Steiden has represented clients struggling with both Chapter 7 and 13 bankruptcy with over 15,000 successful case filings. Him and his team have the right legal knowledge and courtroom know-how to effectively represent you throughout every step of the bankruptcy process. Get in contact with him now at to set up your first consultation.
Eric Steiden and his team proudly represents individuals throughout Kenton County, Boone County, Campbell County, Gallatin County, Grant County, Pendleton County, Bracken County, Robertson County, Mason County, in Kentucky, along with those who reside in Hamilton County, Butler County, Clermont County, Warren County, Clinton County, Montgomery County, Greene County, Preble County, Darke County, Highlands County, Miami County, Shelby County, Champaign County, Clark County, Brown County, Adams County, Lawrence County, and Scioto County, Ohio.
Overview of 401K and Bankruptcy in OH
- Teacher Retirement Plans and
- Pension Plans
Can I Keep My Retirement Plan
Many individuals filing bankruptcy are concerned that that they will be unable to keep the funds in their retirement plans. In most cases, retirement savings are exempt. Individual retirement accounts , 401 plans and pension plans through an employer are always protected. An IRA is exempt up to $1,000,000.00 and other retirement plans are exempt in their entirety. However, in certain cases, funds that individuals put away for their retirement may not be able to be protected. An experienced bankruptcy professional can interpret the bankruptcy code to determine which funds are protected and which are not.
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Your Home And The Chapter 7 Bankruptcy Trustee
Chapters 7 and 13 work very differently, so it’s important to understand what to expectespecially if you want to keep valuable property in Chapter 7. Here’s how it works.
After filing for Chapter 7, your property will go into a bankruptcy estate held by the Chapter 7 bankruptcy trustee appointed to your case. However, you don’t lose everything because you can remove property reasonably necessary to maintain a home and employment. The trustee will sell any remaining assets and distribute the sales proceeds to your creditors.
Here’s the tricky partif you make a mistake, it’s unlikely that the bankruptcy judge will allow you to dismiss the case, and you could lose the house. So you must follow the rules carefully.
How To Claim Your Exemptions
To claim your Chapter 7 bankruptcy exemptions, you must list them under your Schedule C: The Property You Claim As Exempt. Itâs important to list all the property that you want to protect on your Schedule C.
Anything that you do not claim as exempt, regardless of if itâs eligible for protection or not, will not be counted as exempt. This means that even if your property falls within your exemption limit but you do not claim it, your bankruptcy trustee is still allowed to sell it.
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What If I Am Receiving Income From My Retirement Accounts
You will need to take your retirement income into consideration whether you file for Chapter 7 or Chapter 13.
If you are already receiving your retirement income, youâll need to consider that amount when determining your eligibility for Chapter 7. Retirement income will also be calculated into the payment for a Chapter 13 plan.
Generally speaking, people who are relying on retirement payments and/or Social Security payments as their only income will still qualify to file a Chapter 7 bankruptcy.
Your retirement income vs. you Social Security income
Itâs important to note that retirement income is treated differently than your Social Security benefits. Unlike your retirement income, your Social Security benefits are not considered income and do not go into the means test calculation.
Bankruptcy Lawyer In Cincinnati Oh
Are you thinking about filing Chapter 7 or Chapter 13 bankruptcy and have concerns about protecting your 401 or other retirement account? If so, then we highly suggest you get in contact with the experienced legal team at Steiden Law Offices. Eric Steiden and his staff will work tirelessly to protect as many assets possible during your bankruptcy. With his years of experience and extensive financial knowledge, Attorney Steiden can effectively represent you and your interests.
Our Cincinnati bankruptcy lawyers accept clients throughout the greater Southern Ohio and Northern Kentucky area including Norwood, Forest Park, Covington, Erlanger, Florence and many others. To get in touch with Steiden Law Offices, call us at to set up your first consultation free.
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What If My Retirement Accounts Are Used As Income
Your retirement income may be factored into your eligibility for Chapter 7 bankruptcy. It may also be calculated when creating your Chapter 13 repayment plan. Any income you receive from your retirement plan can be considered during the means test. However, Social Security payments are different in that theyre not considered income and wont be calculated in determining your eligibility to file for bankruptcy.
Who Qualifies For Chapter 7 Bankruptcy
There are a few requirements you’ll need to meet to file for a Chapter 7 bankruptcy:
- You generally must complete an individual or group credit counseling course from an approved credit counseling agency within 180 days before filing.
- Either the average of your monthly income during the previous six months must be less than the median income for the same-sized household in your state or you must pass a means test, which determines if your disposable income is high enough to make partial payments to unsecured creditors. If you don’t pass the means test, you may still be able to file a Chapter 13 bankruptcy.
- You can’t have filed a Chapter 7 bankruptcy during the past eight years.
- You can’t have filed a Chapter 13 bankruptcy during the past six years.
- If you tried to file a Chapter 7 or 13 bankruptcy and your case was dismissed, you have to wait at least 181 days before trying again.
- You may be eligible to file, but a court could dismiss your case if it determines you’re trying to defraud your creditors. For example, if you take out a loan or use credit cards with the intent of then declaring bankruptcy to avoid repaying the debt.
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