What Happens to Retirement Plans in Bankruptcy?

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What Happens to Retirement Plans in Bankruptcy?

When you file for bankruptcy, certain assets are protected under exemptions. Apart from the equity in the home, a vehicle, and household necessities, your pension and retirement funds are included in such exemptions. However, there are limitations attached to them too, inform experienced bankruptcy lawyers of Dallas based firm Recovery Law Group . It is important to know the rules prior to a bankruptcy filing.

After overhauling of bankruptcy laws by the Congress in 2005, nearly all ERISA-qualified retirement accounts and pension plan funds are protected from collection action of creditors, with some exceptions. In the case of Chapter 7 bankruptcy, liquidation of non-exempt property takes place. However, retirement funds are protected by Congress and state exemptions; while in Chapter 13, balance in your retirement account does not affect your monthly repayment plan to pay back creditors over a 3 to 5-year period.

In the case of ERISA-qualified pension plans, the exemption amount is unlimited. This includes 401(k), 403(b), IRAs (Roth, SEP, and SIMPLE), profit-sharing plans, Keoghs, money purchase plans, and defined-benefit plans. However, it is important to note that since most general savings accounts, stock options and investment accounts are not ERISA-qualified, they are not protected. Some states do offer exemptions to protect bank and investment accounts, but the limit is capped ($300 in some cases). any unprotected or non-exempt property is used to pay creditors in both Chapter 7 and Chapter 13 bankruptcy cases.

IRA limitations

In the case of both traditional and Roth IRAs, the amount exempted is $1,362,800 per person. In case the collective balance of all your retirement accounts exceeds the said amount, the excess is used to pay off creditors when you file for bankruptcy. This amount is adjusted every three years to factor rising cost of living. Since the latest adjustment occurred on April 1, 2019, the next is scheduled in the year 2022.

It is also important to know that any retirement benefits you get are not exempted during bankruptcy. In the case of Chapter 7 bankruptcy Dallas, you need to qualify the means test. Any monthly payment from your pension or retirement account will be considered as income and might play an important role in your (dis)qualifying the means test. Though the retirement benefits cannot be touched by the bankruptcy court, it could, however, take any amount which is above that required for monthly expenses and pay it to your creditors. In the case of Chapter 13 bankruptcy, your retirement income determines the portion of unsecured debts you get to repay during your repayment plan.

It is important to know what happens to the retirement funds when you file for bankruptcy. People who are living off their retirement funds are judgment proof and don’t need to file for bankruptcy. For more details about how bankruptcy works, call 888-297-6023 and speak with experienced bankruptcy attorneys.