Answers to Your Questions About Retirement Funds and Bankruptcy

Retirement Plan — Overland Park, KS — Wiesner & Frackowiak LCAre you considering bankruptcy during the later part of your working career? Many Americans struggle with debt and financial challenges even as they start to look toward retirement on the horizon. But you may wonder how bankruptcy will affect your retirement plans. Are your assets safe, or will this create a retirement setback worse than your current challenges with debt?

To help you make the right call about your financial position, here are a few answers to your questions about retirement and bankruptcy.

Are Retirement Savings Safe During Bankruptcy?

The good news for anyone who has saved anything in an official retirement account is that these funds are generally protected during bankruptcy. Accounts exempted from seizure to pay debts include 401(k) plans, 403(b) plans, Keogh plans, and defined-benefit plans (usually pensions). In addition, both traditional IRA accounts and Roth IRA accounts are currently exempted up to a little over $1 million.

Along with being exempt from liquidation, these accounts are usually not considered when planning a monthly repayment amount under Chapter 13 bankruptcy. This is because they are capital assets rather than monthly income.

What Happens to Retirement Funds If You Wait?

Although retirement accounts are safe from liquidation before you retire, the situation is a little different once you begin to withdraw that money after retiring.

Once you tap it, the retirement money becomes part of your monthly income and is used when calculating a repayment plan. And if you file Chapter 7, the money you have withdrawn may be subject to the same seizure rules as any other cash held in bank accounts. The same is true for pension, or defined benefit, plans.

Will You Lose Assets Outside Retirement Accounts?

Do you have any assets held outside your retirement accounts that you intend as part of your overall plan? These will be involved in your bankruptcy, although in different ways depending on the chapter you file and which asset exemption rules you must (or choose to) follow.

Many Americans plan to keep a paid-off home as part of their retirement plan. Unfortunately, your home may be at risk if you choose Chapter 7. Similarly, non-retirement bank accounts or investments are treated just like other holdings — even if you have specifically earmarked these for your retirement. Chapter 13 filers may also see large taxable, non-retirement savings accounts used as part of payment calculations.

If you hold significant assets outside your retirement plan or want to save the home you intend to use in retirement, it may behoove you to protect these by filing Chapter 13 (repayment plans) rather than Chapter 7. With Chapter 13, you can continue to repay some loans (such as a mortgage) and make monthly payments to creditors rather than seek an immediate, one-time discharge.

Is Social Security At Risk?

Current law prevents your Social Security checks themselves from being seized as part of any bankruptcy. However, as with retirement withdrawals, things are tricky once the money hits your bank account.

Those who file Chapter 7, for example, generally do not include Social Security income for the means test. However, it is included when calculating your monthly budget both for Chapter 7 qualification and Chapter 13 payments.

Where Can You Learn More?

While efforts are made within the bankruptcy system to protect dedicated retirement funds, each person’s situation may be a little different. If you have specific questions about your retirement accounts or plan, start by consulting with an experienced bankruptcy attorney in your state.

Wiesner & Frackowiak, LC, has served the bankruptcy needs of Kansas and Missouri residents for more than 20 years. Call today to make an appointment and learn more about how your late-life bankruptcy might help or hinder your retirement plans.

Leave a Reply