When you determine that filing for bankruptcy is in your best interest, it’s necessary to understand that most retirement accounts, including 401(k)s and ERISA accounts, are typically protected and not taken by creditors. However, there are a number of exceptions, including limits on IRA protections and withdrawals from these accounts. Understanding these rules can help you protect your retirement account while seeking debt relief. Keep reading to learn more and discover how a Memphis, TN consumer bankruptcy lawyer can assist you during these formidable times.
Why Retirement Protection Matters During Bankruptcy
When considering whether or not bankruptcy is the right option for you, you may have carefully considered all possible risks. While you understand the difference between Chapter 7 and Chapter 13 and know that this process will impact your credit for a few years, you may not have considered how this will affect your retirement plans. As such, it’s essential to understand how bankruptcy will impact your retirement funds
Common Concerns About Retirement and Bankruptcy
- Fears that retirement savings will be used to satisfy debts and creditors
- Uncertainty regarding which accounts are protected
- Confusion regarding how withdrawals impact bankruptcy eligibility
- Concern regarding long-term finances after filing
Are My Retirement Plans Protected if I File for Bankruptcy?
Generally, all Employee Retirement Income Security Act (ERISA)-eligible accounts will be shielded during bankruptcy, with few exceptions. The funds in the account must remain in the account. If they are withdrawn, they can be taken during the filing process.
Which Retirement Accounts are Protected
- 401(k)s
- Roth, SEP, and SIMPLE IRAs
- Money purchase plans
- Defined-benefit plans
It’s important to understand that IRAs are protected up to a federal limit, which may be periodically adjusted for inflation. You should also understand that protection will only apply to the funds if it remains in the account.
Tennessee also offers exemptions for teachers’ and state employees’ retirement plans and pensions.
How Chapter 7 and Chapter 13 Impact Retirement Accounts in Memphis
When you decide to file for bankruptcy in Tennessee, understanding what you can expect from this process is critical. As a consumer, you’ll generally need to determine which bankruptcy filing option is in your best interest. In general, consumers must determine whether or not they must file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 and Retirement Accounts
- Non-exempt assets may be liquidated, but eligible retirement accounts are generally protected and excluded from the filing
- Funds withdrawn from retirement accounts lose their protected status, meaning they can be seized by creditors
Chapter 13 and Retirement Accounts
- Retirement accounts will remain protected over the course of your repayment plan
- Monthly retirement income can impact repayment plan calculations
- Allows you to retain assets while restructuring debts over the course of three to five years
What Limits and Risks Should I Be Aware of?
It’s important to understand that there are always risks when filing for bankruptcy. Though the aforementioned accounts are protected, some are to an extent. For example, IRA and Roth IRA accounts have limited protection. If you have more than $1,512,350 in these accounts, the courts may order that excess funds be seized to pay creditors.
Similarly, the funds in the retirement account are exempt, but the benefits you receive as income from these accounts are not protected. For example, if you file for Chapter 7 bankruptcy and receive a monthly payment from the account, this payment will count towards your income during the means test. In Chapter 13, the courts will use this to help determine your unsecured debt.
You should note that if you put a considerable amount of funds into your retirement account, it could be flagged. This may be seen as an attempt to shield assets that would otherwise be vulnerable to liquidation.
Important Risks to Consider
- IRA protections are capped and may not cover high balances
- Funds withdrawn from a retirement account lose bankruptcy protections
- Retirement income can impact eligibility and repayment calculations
- Large, pre-bankruptcy contributions can be scrutinized as fraudulent
How Can an Attorney Help Me Protect My Savings?
When you want to file for bankruptcy, it’s in your best interest to enlist the assistance of an experienced attorney. Unfortunately, this can be an extremely complex process, so having someone well-versed in the legal issues surrounding bankruptcy is vital.
Not only can an attorney help ensure all the necessary paperwork is complete and legally valid, but they can also advise you before you make any deposits or withdrawals from your retirement accounts during this process.
Contact an Experienced Memphis Bankruptcy Attorney Today
Though your retirement accounts are protected, there are limitations. As such, enlisting the guidance of an experienced attorney is essential. At the Arnold Law Firm, our dedicated legal team can help you navigate this complex process. Contact our offices today to learn how we can assist you during a free consultation with a member of our firm.
