If you must file for Chapter 7 or 13 then you can breathe easy because you will be allowed to keep your retirement plan funds and your pension. However, there are limitations.
Exempt Retirement Accounts
Please remember if you must file bankruptcy, you will not lose everything. There are bankruptcy exemptions that help protect you and some assets. In 2005, Congress redid the bankruptcy laws. Almost all ERISA-qualified retirement accounts along with pension funds are now exempt so creditors cannot come after them. However, some exceptions do exist.
- Chapter 7: In this chapter, you will be forced to give up property but not your retirement funds. Congress guarantees this protection. Also, you must check state exemptions.
- Chapter 13: You do not need to worry about your retirement accounts because they remain exempt. Also, they do not take into consideration the balance of such accounts for your repayment of creditors using the three to five-year repayment plans set forth under Chapter 13
Please remember, the above exemptions refer to your retirement accounts. This does not take into consideration what will happen when you withdraw the amount.
Retirement Accounts with Full Protection
Please remember the exemption amounts are limited with very few exceptions. The following fully protected accounts fall under the ERISA-pension plans.
- IRAS such as SIMPLE, Roth, and SEP
- Profit sharing plans
- Defined benefit plans
- Money purchase plans
Investment accounts, stock options, and general savings accounts have no protection during bankruptcy unless they are an ERSA qualified plan. In addition, very few states offer any protection for investment and bank accounts. You will lose all unprotected funds under Chapters 7 and 13. The money goes to settle debt with creditors.
Roth and Traditional IRAs
The exemption amount has been set at $1,362,800 per person. This is the amount that cannot be touched by the court during bankruptcy. Remember, this combines all your account amounts. If you have more than in your accounts, the bankruptcy court will seize it to pay off your creditors. Every three years the exempt amount adjusts to take into consideration the cost of living expenses.
Retirement Funds Not Exempt from Bankruptcy
Any retirement funds paid to you are not exempt from creditors.
- Chapter 7: Any monthly payment that you receive from a retirement account or pension is income. It is figured into your Chapter 7 bankruptcy. They are unable to take any funds that you need for support but any amount over your basic needs will be taken and used to pay off the creditors.
- Chapter 13: Your retirement income is used to factor in the amount that you must pay towards your repayment plan.
Social Security Benefits
Federal law states that most creditors cannot garnish any part of your Social Security. However, if you have federal debts such as taxes, student loans, child support, court-ordered restitution, or alimony then money can be taken from your Social Security payment each month before you ever receive it. Also, as soon as your Social Security payment is deposited into your account then a creditor can automatically seize it. A law that was passed in 2011 states that banks must know if any of the money in the account is Social Security and they must hold back two months’ worth from creditors.
Annuities During a Bankruptcy
The Internal Revenue Code gives protection for annuities in most cases. The rendered protection depends on how the annuity was funded and if there are any payment conditions. If the annuity is set up to pay you at 65 then it is protected during bankruptcy.
Understanding the Discharge of Debt
With a Chapter 7 bankruptcy, medical bills are eligible to be discharged. Also, utility bills, credit card debt, certain court judgments, personal loans, and attorney fees can be discharged. Student loans, tax bills, child support, mortgages, and car loans cannot be discharged.
Please remember, that many seniors are at an age where they are considered judgment proof, so they do not need to file for bankruptcy. Before taking any bankruptcy action it is imperative that you schedule a consultation with a qualified bankruptcy attorney who will be able to tell you about your options, the different types of bankruptcies and what to expect.
Get The Help You Need From Our Experienced Bankruptcy Lawyer
Gregory Oberhauser has the experience you need when hiring a local bankruptcy lawyer. He can help you navigate the state and federal laws when deciding whether or not bankruptcy is the right option for your situation. Call us today for a free consultation. 978-452-1116