Filing for bankruptcy can be extremely stressful. The thought of possibly losing your home and property is one thing. The idea of losing your retirement savings adds a whole level of stress and apprehension to people who are considering bankruptcy. Well, there is good news here. For the most part, your retirement savings cannot be used to pay creditors during bankruptcy proceedings.
ERISA Qualified Plans vs Non-ERISA Qualified Plans
There are generally two types of retirement accounts. These are ERISA Qualified Plans, which refers to the Employee Retirement Income Security Act, and Non-ERISA Qualified Plans.
ERISA Qualified plans are those that are usually offered by your employer, such as a 401K for a 403B, among others. These are plans established by an employer, meet IRS guidelines, and are tax-exempt.
Non-ERISA Qualified Plans are retirement plans, which are usually some form of IRA.
Retirement Plans are Protected by Law and Supreme Court Rulings
When it comes to being protected during bankruptcy, the Supreme Court ruled that ERISA Qualified Plans are not allowed to be used to pay off creditors. According to the bankruptcy Abuse Prevention and Consumer Protection Act, Non-ERISA Qualified Plans are also protected, but only up to a certain amount. Currently, that amount is a total of $1,362,800. That amount is increased for inflation every three years, with the next increase not happening until April 2022.
Bankruptcy is Meant to be a New Beginning – Don’t Touch Your Retirement If You Don’t Have To
The idea of bankruptcy is to have a fresh start and not ruin your whole life. Times such as this, when so many people and businesses are considering bankruptcy protection, can have a long-lasting impact on people and their lives. The idea of protecting a family’s retirement accounts is to allow people to maintain their future they have worked so hard to save for.
Since retirement accounts are protected, before you withdraw your money, contact our office to discuss your options. Withdrawing money early from most accounts include a significant penalty. This means, you are removing money from retirement, losing some of that money right off the top, and have to pay taxes on the amount withdrawn to pay off part of a debt that might be able to be discharged.
Retirement Plan Rules Cannot be Opted-out of by States as some other exemptions can be
Bankruptcy laws have exemptions besides retirement accounts that deal with how your home, car, and other property are handled. There are guidelines in the Federal Law, and states may opt to follow the Federal guidelines or draft their own guidelines and opt-out of the Federal plan. Federal guidelines on protecting retirement accounts is not an area that states can opt-out of. These guidelines are in place and apply to all bankruptcy filers, regardless of whether they file through Chapter 7 or Chapter 13.
While retirement accounts are protected from being used to pay off your creditor, there are times when your retirement accounts might not be fully protected. If the IRS has a tax lien against you, there is a possibility that they may be able to tap into your retirement. Also, if you are going through a divorce proceeding, your spouse may be able to receive a portion of your retirement savings.
If you have any questions about bankruptcy and your retirement accounts, please call Kamini Fox to schedule a free consultation.