How is bankruptcy going to impact your future? Are you worried about your retirement after bankruptcy? Or perhaps you’re already in retirement and find yourself considering bankruptcy to alleviate financial stress. You’ll be happy to know that generally speaking, retirement accounts are protected during bankruptcy. However, as with anything, there are exceptions. It’s a good idea to meet with a bankruptcy lawyer to discuss the specifics of your case.

In the meantime, here is an in-depth look at how bankruptcy affects retirement accounts and your retirement lifestyle, depending on what stage you’re at in life and which type of bankruptcy you choose to file.

 

Does Bankruptcy Affect Retirement Accounts?

Federal bankruptcy laws protect most retirement accounts. There are limitations to consider, and there are state-specific rules that will dictate what you can keep, as well. This is why it’s helpful to have a lawyer on your side to explain all the nuances. There are different rules for different types of accounts.

401(k) and Other Employer-Sponsored Accounts

Employer-sponsored accounts or those that qualify for the ERISA (Employee Retirement Income Security Act) are included with unlimited protection. These accounts must meet IRS requirements and be tax-exempt and can include:

• Section 401 plans, including 401(k)
• Section 403 profit sharing, such as 403(b)
• Deferred compensation plans, like the 457(b)
• Most government plans
• Most plans from tax-exempt organizations
• Defined-benefit plans, such as Section 408 pensions

If you have a plan that is a non-ERISA account, it might still be protected, but you won’t get the unlimited protection that comes from having ERISA-qualified retirement accounts or funds.

Individual Retirement Accounts

IRAs are like 401(k) retirement plans, but they are set up by the individual (you) instead of an employer. These plans aren’t required to comply with ERISA guidelines, so they don’t have the unlimited exemption that you get with employer plans. There are some exceptions here to consider, too, which is another reason having a lawyer can come in handy.

Some simple IRAs and rollovers qualify for the unlimited exemption. However, even if it’s not unlimited, you still get generous protection. As of April 2022, the latest update, the federal law offers protection for up to $1,512,350 in IRA savings. This is across all accounts, not per account.

That’s $1.5 million that is protected from any recourse during bankruptcy, which for the average person, is probably more than they have in the accounts at this point, anyway.

Federal Non-Bankruptcy Exemptions

Certain employees and groups are eligible for exemptions and unlimited protection because of their line of work or military service. Those include:

• Railroad workers
• Civil service employees
• CIA employees
• Military service members and Medal of Honor recipients
• Foreign service employees

This rule also protects most veterans’ benefits and Social Security benefits. However, you cannot use the federal bankruptcy exemptions and the non-bankruptcy exemptions at the same time. If you use state bankruptcy exemptions, however, you can also use these non-bankruptcy exemptions in your filing.

Social Security

Speaking of Social Security benefits, these are another area protected during bankruptcy. This only works if the account is being treated like a retirement account, though. This means that your Social Security benefits need to be kept in a separate account from the rest of your money. If the benefits are deposited into your main checking account or mix it with other income, the exemption may not apply.

Withdrawn Retirement Funds

Once you withdraw funds from a retirement account, they lose their exempt status during bankruptcy. It doesn’t matter where you deposit the funds. Even a separate account isn’t enough because you typically have to choose to withdraw your retirement account money.

Social Security remains exempt as long as it’s kept separate from other income because you don’t get to choose when and whether you withdraw funds from your benefits. The government payments are made automatically every month.

 

How Does Bankruptcy Affect Retirement Contributions in Athens?

The next question people have is whether they’ll still be able to make contributions to their retirement accounts during bankruptcy. This depends on two main factors: the type of bankruptcy filing you are considering and whether your contributions are voluntary or mandatory.

• Mandatory: Some employers mandate retirement contributions for each pay period, such as with government and public retirement systems. These contributions can be deducted from the Chapter 7 means test. You can also continue to make these mandatory contributions throughout the bankruptcy process whether you file Chapter 7 or Chapter 13.
• Voluntary: Any retirement contribution you have control over is considered voluntary and cannot be deducted from the means test. Whether or not you can continue contributions depends on the case and the courts. There’s also an ongoing debate over whether voluntary contributions can be included on your Chapter 13 Form 122C-2.

In Chapter 7, these contributions don’t usually have to be stopped because the process only lasts a few months and the contributions won’t have a large impact on your income or the outcome of your bankruptcy discharge.

In Chapter 13, you may spend three to five years repaying your debts. Therefore, not all courts will allow people to continue to make contributions for this period. You’ll have to speak to your bankruptcy trustee to find out the specific rules in your jurisdiction so that you know how to proceed.

 

How Does Retirement Income Impact Bankruptcy?

So, what if you’re already retired and collecting your income from these accounts? That income can still have an impact on your bankruptcy, in several different ways. Again, it depends specifically on which type you file.

Chapter 7

As mentioned, in order for people to qualify for Chapter 7 bankruptcy, they have to pass a means test. This proves that your income is below the median state income level where you live (in this case, Georgia’s median household income is about $65,030). If you use monthly retirement benefits for costs of living expenses, they may be used to calculate your income. If you have retirement benefits that go beyond your basic support needs, those could be used to repay your debts.

Chapter 13

With Chapter 13, your income has a direct impact on how your debts are repaid. This type of bankruptcy is focused on reorganizing your debt and making it more manageable. Retirement benefits can be factored into your income calculation if you’re living off of them at the time, which can increase what you are expected to repay. As with Chapter 7, if you have funds above and beyond your needs, those could go directly toward your bills at the court’s discretion.

 

Choose an Experienced Bankruptcy Lawyer for the Best Outcome in Athens

Bankruptcy lawyers know federal, state, and local laws surrounding bankruptcy and retirement, and they have years of experience in filing these cases. At Morgan & Morgan, we’ve amassed an impressive 70+ collective years of experience in bankruptcy and financial law, including handling cases with retirement accounts and income on a regular basis.

Experienced lawyers can help you better understand your retirement accounts and how they could impact your bankruptcy case. Whether you’re just getting a good groove on making plans with those retirement savings or you’re already living off your retirement income, it’s important to know how that’s going to play a role in the proceedings.

If you’re ready to discuss your case or you have more questions about how retirement factors into your financial situation, schedule a consultation today. We’ll help you get a handle on things and get your bankruptcy case started so that you can work on getting your life back.

 

FAQs

What employer retirement accounts are protected by bankruptcy?

ERISA-qualified accounts that are protected during bankruptcy include:

• 401(k) and 403(b) plans
• Keoghs
• Profit-sharing plans
• Money purchase plans
• Defined benefit plans
• Company-sponsored IRAs

Can I still collect Social Security benefits after bankruptcy?

Because Social Security is a government benefit, your payments are not impacted by bankruptcy. These are seen as mandatory because you cannot choose to take the disbursement, so you’ll continue to receive them. If you do not funnel your Social Security funds into their own account, however, they cannot be exempt from being included as part of your income or repayment funds.

Will I lose my pension if I file for bankruptcy?

If your pension is an ERISA plan, you will get to keep it. These are exempt and protected by bankruptcy. If, however, you have a pension from the following organizations, it may not be protected:

• Government pensions
• Non-profit organizations
• Churches
• Partnerships
• Tax-exempt organizations

Can I use retirement accounts to pay down debts?

You can absolutely use your retirement savings to pay off debts, either to avoid bankruptcy or as part of Chapter 13 repayment plans. However, you have to remember that there are tax penalties for withdrawing funds from IRAs and 401(k) accounts before you reach age 59 ½. If you are already receiving retirement account disbursements, those funds will be added to your income, so they may impact your ability to qualify for bankruptcy until or unless you use some to pay down the debts you have.

How can I ensure the best outcome?

If you want to protect your retirement accounts and your financial future, the best thing to do is to hire a qualified bankruptcy lawyer that knows the laws in Athens, GA. They will be able to go over your accounts and retirement income with you, explain what to expect, and then help you decide on the best course of action.

Related Content: What Happens at the End of Chapter 13 Bankruptcy