Getting pension benefits at the end of a hard and long career is what drives most people to work. When you retire, your pension is what you will be surviving on. However, during the course of your career, there might come a time, when you face financial problems due to which you might have to consider bankruptcy as an option to survive. Since in bankruptcy, some of your assets are used to pay off the creditors before your debts are wiped out, one of the major concern people have is whether their retirement funds are at risk? According to Los Angeles based bankruptcy law firm Recovery Law Group, your retirement accounts are protected in the bankruptcy process. This is because the law understands that people work hard and save money in pension and other retirement accounts to reap benefits at an age when it is not possible for them to work anymore.
How are retirement accounts protected during bankruptcy?
When an individual files for bankruptcy, everything they own comes under bankruptcy estate. Amongst these, some assets are protected by State bankruptcy exemptions (which vary from one state to another) which may include the equity in your car or home. Other assets which are saved due to exemption include any compensation plans, tax-deferred allowances, and any employer-based retirement plans. Since all of these are exempted, they cannot be a part of the bankruptcy estate and therefore cannot be used to pay back creditors.
Sometimes, retirement plans are set as trusts. They are worded in a manner which makes it impossible for creditors to use them during bankruptcy. Thus, retirement plans are protected by a double layer of shield. However, any unusual trust is scrutinized by the bankruptcy court; i.e. if you structure a plan in the form of a trust which you are funding and you are the sole beneficiary, then such a trust is not protected during bankruptcy.
The federal law has set a list of bankruptcy exemptions and also allows different states to have their own set of exemptions. States also offer the debtor the option of choosing from only the state exemption or choose between the state and federal bankruptcy exemptions. The state of California requires the debtor to choose the California state law exemptions, but some non-federal exemptions, such as those for retirement plans are also applicable in California.
Federal exemptions for retirement accounts
Changes made in the bankruptcy laws in 2005 were not exactly debtor-friendly, except for those involving the retirement funds. These accorded improved protection for debtors. As per the changes incorporated in the federal law, all retirement accounts and pension funds are protected from creditors, even in states where bankruptcy filers don’t have the option of choosing federal bankruptcy exemptions. What’s even better is that the exemptions amount is not limited. Few examples of federal exemptions include:
- Defined benefit plans
- Employee annuities
- ERISA (qualified) pension plans
- Government deferred compensation plans
- Money purchase accounts
- Profit sharing plans
- Stock bonus plans
However, there are limits to the exemptions provided. The traditional IRA and Roth exemptions are capped with the amount over $1 million.
California pension payment and exemptions
Californians who are contemplating bankruptcy due to immense financial pressure are often worried about their retirement funds. However, with federal law, California state law and specific terms of trust accounts, creditors find it extremely difficult to nick a penny from your retirement funds. Even when you have received money from retirement funds, the money is exempted, i.e. creditors simply cannot take that money because it is out of your pension accounts.
Considering the fact that your retirement funds are protected by numerous layers of federal and state exemptions, it is important to not touch those funds if you plan to file for bankruptcy. You might be tempted to use the money from retirement accounts to pay off some debts. Since retirement funds are protected from bankruptcy, using that money to pay creditors is not a wise move. The money might not be enough to clear the debt, which will result in you still having some debt and without a source of income when you retire. You require the assistance of a financial planner or a bankruptcy lawyer to help determine the best course of action for you. If you wish to gather more knowledge about the bankruptcy procedure, feel free to contact 888-297-6203. Bankruptcy lawyers can explain the difference between using retirement fund money to pay off debts or using bankruptcy to get rid of debts while retaining your pension funds.