Do you know what happens to retirement accounts and retirement savings during a bankruptcy? It depends on whether or not you are retired or planning to retire. It can also depend on whether you filed Chapter 7 or Chapter 13 bankruptcy.
If You File Bankruptcy Before You Retire:
If you file Chapter 7 bankruptcy before you retire and retirement funds are still in your retirement accounts (i.e., 401(k), 403(b), 457(b), Keogh, etc.), the funds cannot be touched by creditors. No matter how much money you have saved for retirement, they will not be used to pay creditors.
The money in the above-listed types of accounts will also not affect the amount the bankruptcy is required to pay back after filing Chapter 13 bankruptcy. Chapter 13 bankruptcy is more complicated than the more common Chapter 7 bankruptcy because it requires that the court works with the filer to set up a repayment plan.
Funds saved in IRA, Roth IRA, SEP-IRA, or SIMPLE IRA accounts are also usually exempt from creditors up to a certain amount. The limit for exemption is set at $1,362,800 (for combined IRA balances). This limit is valid through April 2022 as the amount is adjusted every three years to accommodate changes in the cost of living.
If You file Bankruptcy After You Retire:
If you are already retired and you are filing bankruptcy, you are probably taking income from your retirement accounts. The money taken as income from your retirement accounts is accessible to creditors listed in the bankruptcy. The main issue to be considered will be how much income is necessary for you to cover your living expenses. Retired individuals filing Chapter 7 bankruptcy should be aware that any amount above what they need to support their basic needs is considered disposable income and will be made available to creditors. Retired individuals who file Chapter 13 bankruptcy should expect the income they pull from their retirement account or plans to be included when the court determines how much debt they are capable of repaying.
Considering Social Security Benefits and Debt:
When it comes to Social Security benefits, there are some special considerations. Most debtors cannot be garnished (exceptions can be made for the payment of federal taxes, other federal debts including student loans, child support, alimony, court-ordered restitution owed to a victim of a crime, etc.) Social Security benefits have partial protection from creditors due to their status as a federal benefit. Once the money is in your bank account, it can be taken by creditors, but a rule established in 2011 requires that banks identify accounts that include funds from federal benefits and must protect two months’ worth of benefits from creditors seizing funds.
If you are considering filing for bankruptcy and you need to discuss the pros and cons of filing, please don’t hesitate to get in touch. Most bankruptcy offices in the Chattanooga area don’t have a single Consumer Bankruptcy Specialist on staff. Our office is the only office in Chattanooga with two. You are in good hands with Kenneth C. Rannick P.C.