Saving for retirement is one of the greatest gifts you can give your future self. The more diligent you are about putting money away, the more easily you’ll be able to enjoy life after you stop working. But while you’re planning for the future, present circumstances can get out of control. Medical emergencies, job losses, rising prices and indiscriminate spending can all lead to insurmountable debt, leaving you with few options. If you’re considering bankruptcy and are concerned that it will deplete the money you’ve worked so hard to save, there’s good news: in most cases, you will be able to hold onto pension and retirement funds, even when filing for Chapter 7 or Chapter 13. Here’s what you need to know.

When you file for bankruptcy, you can protect the property that you need to work and live through bankruptcy exemptions. You are also able to protect almost all ERISA-qualified retirement accounts from your creditors as long as the monies remain in your account. This includes 401(ks), 403(b)s, IRAs, Keoghs, profit-sharing plans, money purchase plans, and defined-benefit plans. General savings accounts, stock option plans, and investment accounts are not protected.

If you cash those accounts out – which many people are tempted to do – the funds are no longer considered part of your retirement, and the trustee may attempt to use them to pay some of your debts. If, in the face of financial trouble, you’ve opted to withdraw retirement funds, you’ve probably already paid a penalty or fees for early withdrawal. It is possible to protect the cash that you’ve withdrawn by using a wildcard or cash exemption, but these are not widely available and are often limited in the amount that can be exempted. Monthly payments disbursed from retirement accounts are also not exempted: they are considered income and will be used to calculate your eligibility for Chapter 7 bankruptcy or for your payment plan under Chapter 13.

Be aware that if your retirement savings are in a traditional or Roth IRA, there is a limit to the amount that can be exempted. The first $1.5 million that you have in the accounts, in total, will be untouchable, but amounts above that can be taken by the bankruptcy court to pay off those to whom you owe money.

For information on how bankruptcy will specifically impact you, contact our bankruptcy attorneys today to set up a time for us to talk.

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