You may find filing for bankruptcy to be a difficult decision. However, if financial obligations exceed your capacity to manage them, choosing bankruptcy may be a responsible way to reorganize or discharge your debt. An experienced bankruptcy attorney at Walker & Walker Law Offices can guide you through the process.
What happens to retirement accounts during bankruptcy? If you contribute to an employer-sponsored 401(k), a Roth IRA, or another retirement account, you likely want to ensure those funds remain protected, regardless of whether you pursue relief under Chapter 7 or Chapter 13. Continue reading to learn how bankruptcy may impact your retirement savings and what safeguards the law provides.
Is Your Employer-Sponsored Retirement Account Safe?
Creditors cannot access your employer-sponsored retirement account when you file for bankruptcy. Whether you hold a 401(k), 403(b), or pension, the Employee Retirement Income Security Act (ERISA) protects these funds without imposing a dollar limit. However, once you withdraw funds from these accounts, the law no longer protects them. At Walker & Walker, we always review the details of your accounts to confirm their type and ensure they remain protected. Keep in mind that once funds are withdrawn from these accounts, they are no longer protected, so understanding these rules helps you make informed financial decisions and safeguard your future.
What About My IRA?
Both traditional and Roth IRAs receive federal protection when you file for bankruptcy. In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to safeguard retirement savings you accumulated through employment. However, creditors can still claim certain funds despite these protections.
The current BAPCPA cap is $1.5 million, and regulators adjust for inflation every three years. If your account balance exceeds the protected threshold, creditors may claim the excess.
The court may apply the exemption cap if you roll over funds from an ERISA-qualified plan and combine other funds. Additionally, federal bankruptcy law does not protect inherited IRAs unless they qualify for a surviving spouse exemption. Understanding how these rules apply to your retirement assets ensures your savings remain secure under federal law during bankruptcy proceedings.
Does the Bankruptcy Type Matter to My Retirement Accounts?
The type of bankruptcy you file can influence how retirement income and contributions are viewed during your case. In a Chapter 7 bankruptcy, retirement contributions are not part of the budget analysis, and protected retirement accounts themselves are not used to pay creditors. However, withdrawing funds from a retirement account during the case can create income that may need to be addressed.
In a Chapter 13 bankruptcy, ongoing retirement contributions are permitted within certain limits and may be included in the repayment plan budget. The court reviews these contributions as part of your overall financial picture to ensure the plan complies with bankruptcy requirements and remains workable over time.
Our attorneys will review your retirement accounts and contributions carefully, explain how they are treated under your specific chapter, and help you make informed decisions that protect your long-term financial stability.
Action To Avoid Before Filing for Bankruptcy
There are a few actions to avoid before filing for bankruptcy to safeguard your retirement accounts. Withdrawing funds from these accounts eliminates their exemption and allows creditors to access your assets. If you make a large contribution immediately before filing bankruptcy, the court may interpret it as an attempt to misrepresent asset availability, and repaying a loan from your 401(k) may lead the court to conclude that you prioritized personal repayment over outstanding debts. Understanding how bankruptcy affects retirement accounts helps you make choices that support your long-term financial stability.
Consult With an Attorney Who Understands How Bankruptcy Affects Retirement Accounts
Walker & Walker Law Offices offer the legal guidance and protection you need when preparing to enter bankruptcy court. Our attorneys want you to feel fully supported throughout this manageable process and will explain in detail “What happens to retirement accounts during bankruptcy?” before you appear before a judge. Schedule a consultation to discuss your questions with our legal team today.