Is Bankruptcy a Threat to Your Retirement Accounts?
In recent years, debt has become an increasingly overwhelming problem for many Americans for a variety of reasons. Some financial troubles stem from the weakened economy, which caused high rates of unemployment. Other reasons include the high cost of divorce and subsequent maintenance of separate households, medical bills accrued from unanticipated health problems, and complications in settling predatory home loans. It may seem natural to try to resolve debt problems by spending your retirement savings. However, generally it is not wise to tap retirement or education savings to make minimum debt payments. While the intent may be good, it may not be the best course of action if you ultimately need to file bankruptcy.
Most retirement savings are protected in bankruptcy
The Bankruptcy Rules treat retirement funds as special in order to preserve them for their proper use. Regardless of where you hold funds for retirement — IRAs, 401(k)s, 403(b)s, 457 plans or Roth IRAs — they all have same objective. In most instances, retirement and educational funds receive protection from creditors and exemption in a bankruptcy proceeding. The laws are designed to protect people who made long-term investments from losing their savings if they have to file for bankruptcy. There are some exceptions; for example, you may not stash large amounts of money into a retirement account in anticipation of filing for bankruptcy.
Exemption limitations on traditional and Roth IRAs
The Bankruptcy Code allows filers to exempt up to $1,245,475 per person for both IRAs and Roth IRAs. If the combination of all of your retirement plans exceeds this amount, then the bankruptcy court can use the excess to repay your creditors. This amount is adjusted periodically based on cost of living adjustments. Furthermore, the retirement benefits you receive as income are not exempt. Income is treated differently depending on whether you file under Chapter 7 or Chapter 13.
- Under Chapter 7, you are allowed to keep income from retirement benefits that may be necessary for your support, but amounts beyond what you need for your support can be used to repay your creditors.
- Under Chapter 13, retirement income is included in your repayment plan and can help determine the portion of your unsecured debts that you must repay.
Everyone's financial situation is different. If you are concerned about filing bankruptcy or using your retirement savings to pay off creditors, talk to an experienced Orange County bankruptcy attorney at Fishback Law Corp about your options.