Most individuals look forward to the time when they no longer have to go to work every day and can instead retire, which is why we start saving for retirement during our 20’s and 30’s. In fact, the sooner you start saving and investing, the better! Sometimes though, individuals fall under financial difficulty where they owe substantial amounts of money to creditors with no way to pay. Then, the only option may be to file for personal bankruptcy.
But what happens to these hard-earned retirement accounts and your financial future when you file for bankruptcy?
I general, retirement accounts such as pension plans, 401(k) plans, and IRAs are considered “exempt,” meaning they are protected under federal law from being used to pay off creditors. Even so, you should always speak to a bankruptcy attorney prior to filing to determine the exact laws and regulations regarding personal bankruptcy and exemptions for your particular state.
If you reside in the state of Massachusetts, continue reading for more information regarding retirement funds and bankruptcy.
Bankruptcy Basics
There are two types of bankruptcy available to those who are considering filing, the first being Chapter 7. Chapter 7 bankruptcy is for individuals with outstanding debt and no way to pay. The goal is to discharge the debt completely by allowing a trustee to sell off your assets. Afterwards, there would be nothing left owed to creditors. Some assets are considered exempt under state and federal law and cannot be sold off, but all non-exempt assets are susceptible to pay off the debt.
The second type of personal bankruptcy is Chapter 13. Chapter 13 is for individuals with a regular stream of income and wish to set up a payment plan to pay off their debts. There are limitations on who can file for Chapter 13 and the amount of debt they can discharge, so be sure to speak to a qualified bankruptcy attorney to learn the specific limitations for the state of Massachusetts.
Protected Assets
Most employer retirement accounts are protected under the Employee Retirement Income Security Act (ERISA), put into law in 1974. This protects the money in retirement funds from being seized to pay off debt, including during bankruptcy. Types of funds secured by this act include 401(k) plans, pension, and some 403(b) plans, and there is no monetary limit to the exemption. This Act does not protect other assets though, such as savings accounts, investments, or stock options.
IRAs and Roth IRAs are not protected by ERISA, so the money in these accounts can be used to settle debts. However, in the case of bankruptcy, IRAS are secured by the 2005 Bankruptcy Abuse Prevention and Consumer Protection ACT (BAPCPA). Unlike with the ERISA, though, the federal government does put a limit on the monetary value they will secure. There is also a cap in the state of Massachusetts. A bankruptcy attorney can provide you an accurate amount.
Voluntary Disbursement
While retirement funds are generally protected during bankruptcy, you can voluntarily choose to withdraw funds to help you pay off the debt quicker, but this comes with a price. Below are some of the penalties you may incur:
• Tax penalties if withdrawing funds while under the age of 65
• Income tax
• Potential loss of bankruptcy protection for the account
• Lost employer matching funds
• Early withdrawal cost
Even with these penalties, it may still be tempting to use retirement funds to make your current financial situation easier, but putting your financial future at risk should be considered carefully and not at the whim of the bullying tactics of a creditor. Remember that any money you do take out of your retirement account is more than just you losing its current monetary value; it is also losing its future value, any interest that that money could have earned over time.
Overview
Bankruptcy is a trying experience that should only be considered as a last resort. However, your financial future will not be left completely bereft if you do end up filing for bankruptcy. Your retirement accounts are federally protected (within limitations) so you can still enjoy your retirement. If you are considering filing for personal bankruptcy, seek out the council of a qualified bankruptcy attorney to guide you through the process.
Hines Law is a full-service bankruptcy firm found throughout the Boston area. Over 2 decades of experience and dedication to bankruptcy solutions has made us a top choice. If you are struggling with debt that is taking over your life, there is help. Find out if you qualify for Chapter 7 or Chapter 13 bankruptcy by contacting our law firm to speak to a bankruptcy attorney at No Cost.