The good news is that for the most part, your 401(k) and other qualified retirement accounts are protected in bankruptcy. Traditionally, retirement accounts are almost always protected from creditors and are considered “exempt” when a bankruptcy is filed. An “exemption” in a bankruptcy just means that the asset is safe from the clutches of the court and the bankruptcy filer can keep it with no problem.
Regardless of how much savings you have in your 401(k), 403(b), 457(b), Keogh or other benefit plan, those retirement accounts can not be touched by creditors if you file Chapter 7 bankruptcy, nor will they affect the amount you pay back if you file Chapter 13. If you have funds saved in an IRA (including Roth, SEP, or SIMPLE), these funds are generally exempt from creditors, however there will be a certain limit. As of April 2013, this limit was approximately $1.2 million.
The Federal Bankruptcy Code lists specific assets that are exempt. Your IRA is one such asset, but only if you or your spouse were the ones contributing to it.
According to federal bankruptcy laws, once an IRA is passed on and inherited by another, it loses its protected status. However, this does not apply to spouses. If your spouse passes, the IRA you get from your spouse is considered a “rollover IRA” and will remain protected.
You need to know that these federal bankruptcy exemptions are not applicable in every state. Each state has the option to come up with it’s own exemptions.
What if I am retired?
The circumstances are different if you are already retired and taking distributions. If you are drawing income from your retirement accounts, that money is more accessible to creditors. That accessibility depends on how much income you need to meet your living expenses.
If you were to file Chapter 7 bankruptcy, anything above what you need to support yourself could be fair game to creditors. Should you file Chapter 13 bankruptcy, the income from your retirement plan or plans will likely be included to determine how much you can afford to repay your debt.
Is it a good idea to cash out my retirement before filing for bankruptcy?
In general, cashing out your retirement account prior to filing for bankruptcy is almost never a good idea. There are usually severe penalties and negative tax consequences for cashing out your retirement account early. Additionally, there will be a loss of protection of those funds or assets you bought in bankruptcy.
Charlton & Glover Can Help You
Bankruptcy can be very complicated; we will bring clarity to your questions. If you live in the North Atlanta area, the experienced bankruptcy attorneys at Charlton & Glover are here for you. Call us at (770) 993-1005 to schedule a free initial consultation.