What Happens to Retirement Accounts During Bankruptcy?
You spend a lifetime building up your retirement accounts and savings. When you file for bankruptcy, could they be in jeopardy? What happens to retirement accounts during bankruptcy? In most cases, these accounts can receive some type of protection from creditors.
At Belsky & Horowitz, LLC, we know that you want to protect your financial future. Let’s look at how retirement accounts are treated in bankruptcy.
Bankruptcy and Retirement Accounts
When it comes to retirement accounts, the treatment and protection provided during bankruptcy proceedings depend largely on the type of account and the specific bankruptcy chapter filed.
Most people will choose to either file Chapter 7 or Chapter 13. While these federal and state exemptions protect the bulk of retirement assets, there are exceptions and limitations that you will want to know.
Are There Federal Bankruptcy Protections?
Typically, your retirement accounts are protected during this process. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, tax-exempt retirement accounts are protected from creditors in most bankruptcy cases. With that, you can file for bankruptcy without forfeiting your retirement savings.
Also, the Employee Retirement Income Security Act of 1974 (ERISA) protects employer-sponsored retirement plans, such as 401(k)s, 403(b)s, 457 plans, and pension plans from creditors. Under ERISA, they can be excluded from the bankruptcy estate.
In these cases, an ERISA-qualified retirement account will have nearly total protection in bankruptcy as it remains separate from personal assets. As long as the retirement account remains tax-exempt and complies with ERISA, creditors cannot access these funds during bankruptcy.
If you have an individual retirement account (IRA) or Roth IRA, you can be assured they will be protected during bankruptcy. However, there are specific limitations. Under federal law, traditional and Roth IRAs are protected up to a certain cap. Currently, the cap sits at $1,512,350 per the Federal Register.
Remember that if that IRA balance exceeds the cap, any excess could be used to pay creditors. Since rollover IRAs are funded from ERISA-qualified plans, the regular IRA caps do not apply.
Instead, they are afforded the same protection as other ERISA accounts.
If you have an inherited IRA, these accounts are not protected like others. Since you did not contribute to the account, they lose their projections under federal laws. As a result, they could be accessed by your creditors.
Can Withdrawals and Loans from Retirement Accounts Affect Their Protections?
You could lose federal protections if you have taken these actions against your retirement accounts.
Any withdrawal from the account before a bankruptcy filing will cause that account to lose its exemption. For example, if you removed funds from your IRA and placed them into a checking account, those monies are now considered liquid assets. As a result, they are subject to credit seizure.
Also, that loan will not be discharged if you borrowed from your retirement account before bankruptcy. You will still need to pay back your loans, no matter your bankruptcy status.
What Happens to Social Security or Savings Accounts?
When filing for bankruptcy, the treatment of Social Security benefits and savings accounts differs from retirement accounts. Under most circumstances, Social Security benefits are well-protected during bankruptcy. The Social Security Act 42 U.S.C. § 407 shields these benefits from most creditors and bankruptcy proceedings. These protections apply no matter whether the bankruptcy is filed under Chapter 7 or Chapter 13.
But there are some exceptions. If Social Security benefits are deposited into a bank account, they remain protected if they are clearly identifiable. However, if the benefits are commingled with other sources of income, such as wages or investment income, the Social Security funds could lose their identifiable status. That can make it harder to identify and separate them from other assets.
Unlike Social Security benefits, bankruptcy proceedings do not automatically protect savings accounts. These accounts are considered liquid assets and will be treated as part of the bankruptcy estate.
After working to build your retirement account, the last thing you want to do is lose them in a bankruptcy filing. Fortunately, there are laws that help to protect these accounts from creditors.
With that, you can preserve your retirement savings even in financial distress. However, limitations and exceptions always exist, and you will want to reach out to a Maryland bankruptcy lawyer to learn more about your situation.
