If you are considering bankruptcy, you likely don’t have substantial balances in your bank accounts. However, you may have one or more retirement accounts in which you’ve managed to save a fair amount of money over the years.
What happens to your accounts when you file for personal bankruptcy? That depends in part on whether you choose Chapter 7 or Chapter 13 bankruptcy.
If you file for Chapter 7, it’s more likely that the assets in your bank accounts, like many of your other assets, will be liquidated and used to help pay off your debts. Some may qualify for an exemption, however. For example, if you need some of the money to make child or spousal support payments, or it comes from disability payments, you may be allowed to keep it.
Chapter 13 doesn’t involve liquidation of assets, but a structured repayment plan. Therefore, you aren’t required to liquidate any accounts.
Retirement accounts have more protection, regardless of which type of bankruptcy you declare. Most employer-sponsored plans, such as 401(k)s, are protected in bankruptcy. If your plan falls under the Employee Retirement Income Security Act (ERISA), as the majority do, you don’t have to touch it. If you aren’t sure, check with your employer or plan administrator.
Individual retirement accounts (IRAs), both traditional and Roth, are treated differently than ERISA qualified 401(k)s. However, over $1 million ($1,362,80) is exempt from being taken in bankruptcy, so likely you won’t have to turn over any of it if you file for Chapter 7.
For many reasons, it’s not generally financially wise to withdraw money from a retirement account prematurely. Remember that if you do, that money loses its retirement account bankruptcy exemption.
An experienced bankruptcy attorney will go through all of your assets, including your retirement accounts, with you and let you know how they’re likely to be handled by the bankruptcy court. They’ll also help you determine which type(s) of bankruptcy you qualify for.
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