If you’ve spent years saving for retirement, putting that money at risk when you file for bankruptcy is likely one of your greatest concerns. The bankruptcy liquidation of assets allows the bankruptcy trustee to take your assets and liquidate them to pay your creditors. But does this liquidation apply to your retirement savings?
The simplest answer to this question is “maybe.”
Bankruptcy laws allow you to exempt most retirement savings when you file for bankruptcy. However, exemption laws vary from state to state, and not all types of retirement savings are protected.
Here’s what you should know if you’re filing.
Where is Your Savings?
If you want to understand how bankruptcy affects your retirement statements, start with understanding the various types of savings.
For example, social security payments are safe in bankruptcy until they reach your bank account. Some states do not exempt bank accounts from bankruptcy, so while the court cannot take anything from your established social security benefits, nor can they intervene as the payments are transferred from the government to you, it might be able to take the money once it’s in your account.
One way to protect them? Put them into a separate account so they don’t mix with other income. Your bankruptcy attorney can help you figure out how to best protect your social security income based on your specific situation.
Bankruptcy Protects Pensions, 401k, and Other Savings from Liquidation
Pensions are another concern for people filing for bankruptcy.
If you’ve earned a pension from a private employer, the funds are protected under the Employment Retirement Income Security Act of 1974 (ERISA). Plans must meet specific guidelines.
Furthermore, pensions paid to employees of churches, non-profit organizations, and governments are not covered by ERISA. Speak to your attorney about using these protections and what you can do if you worked for an employer not covered by ERISA.
To learn more about ERISA protections, check out this information from the US Department of Labor.
Additionally, private retirement accounts like 401(k) accounts, and traditional and Roth IRAs are protected in part or full from the bankruptcy court. Bankruptcy laws protect all funds in a 401(k). People with IRAs receive protection up to a certain amount that increases regularly.
Finally, if you have tax-deferred retirement annuities, they are exempt. However, other types of annuities are not.
You and your attorney should review your retirement savings assets and determine the best way to protect the money you’ve earned.
Don’t Use Retirement Savings to Avoid Bankruptcy
Some people turn to their retirement savings to pay off debt and avoid filing for bankruptcy. This might seem like a good idea, but in the long run, it can cost you.
Bankruptcy laws protect retirement savings. Using this money that could remain in your possession to pay debts that qualify for discharge is a waste. Not to mention withdrawing retirement funds early triggers a tax penalty.
You could find yourself relieved of a few credit card or medical debts, but back at square one saving for your retirement and in debt to the IRS.
Before doing anything with your retirement savings, it’s important to speak to an experienced bankruptcy attorney. The bankruptcy liquidation of assets puts your assets at risk. It’s important to have the guidance of an expert. The two of you can review your specific situation and determine the best way to proceed.