When it comes to filing for bankruptcy, one of the biggest questions people have is how it will affect their retirement. It’s a valid concern, as bankruptcy can have a significant impact on your financial future.
Fortunately, there are some safeguards in place that can help you keep your retirement savings intact.
Government protections
Bankruptcy laws in the United States provide important protections for retirement accounts such as 401(k)s, IRAs and Roth IRAs. These accounts are exempt from being used to pay off creditors when someone declares bankruptcy. This gives debtors peace of mind that their money won’t be taken away during this challenging process.
However, while retirement accounts may not be directly affected by filing for bankruptcy, pensions can be claimed by creditors to help pay off debts through other means. Bankruptcy may also impact your credit score, making it difficult to get loans or other forms of financing if you want to purchase a smaller home or motorhome.
And, while your retirement funds are protected, you may have to use the monthly income from your retirement funds to pay off your bankruptcy, depending on the type you filed. Generally, in a Chapter 7 bankruptcy, no monthly payments are required, and your retirement accounts are protected. On the other hand, in a Chapter 13 bankruptcy, assets such as an annuity may be subject to repayment plans.
It is important to note that filing for bankruptcy does not erase all debts; some types of debt, such as student loans and child support, are not eligible for discharge in bankruptcy proceedings. Therefore, it is possible to retire after declaring bankruptcy. Your employer-sponsored plan is protected under the laws of ERISA, and the federal government covers traditional and Roth IRA’s up to $1.5 million.
Every situation is unique, so you should discuss your concerns with someone who can provide guidance before making any decisions about your retirement savings and bankruptcy.
