Declaring bankruptcy is a stressful process, whether you’re dealing with Chapter 7 or Chapter 13. However, contrary to popular belief, you don’t actually lose everything. There are federal and state laws in place that deem certain types of assets exempt from bankruptcy proceedings depending on what they are. Such exemptions include retirement accounts and tax refunds in some cases depending on timing, though many of these rules vary by state. Exemptions for Florida residents are generous and offer unlimited exemptions for homestead, annuities, and life insurance policy. Here are some tips to keep a cool head when you’re dealing with bankruptcy proceedings or considering the option.
One easy rule to remember when thinking about are retirement accounts exempt from bankruptcy is whether your plan is protected under ERISA (Employee Retirement Income Security Act), which basically means almost all types of plans provided by employers. This typically includes 401(k)s, 403(b)s, some IRAs, Keoghs, profit-sharing plans, money purchase plans and defined-benefit plans. However, one important thing to remember is that in the case of traditional and Roth IRAs, the exemption caps at an aggregate of $1,245,475. The fact is that most retirement plans are protected by law since it’s not considered to be the same type of asset that a hefty bank account or valuable property is that creditors can come after. However, retirement plans are also complicated and vary by employer. The best thing to do is contact the provider of your retirement plan directly and obtain all details regarding penalties, investment options and what your current balance is. You may even want to invest more money in your retirement plan if your assets are going to be imminently liquidated, minus necessary costs of living and other untouchable accounts.
There are certain types of debts that cannot be discharged under bankruptcy filings, the most common being student loans. If you’re getting close to retirement and you’re worried about protecting your exempt accounts, student loans may not be the first thing on your mind. However, they should be if you’ve co-signed a loan for a family member. This could be a son, daughter, spouse, or any other relative, and if they default, you’re responsible for the debt. Remember that if you’re a cosigner on an educational loan and the borrower defaults, you’re responsible for the debt and bankruptcy won’t discharge it. This can influence if you decide bankruptcy is right for you, and perhaps to also form a contingency plan in the unfortunate event this were to occur during your golden years.
If you’re over 65, how you approach your retirement strategy in the context of bankruptcy can be a tricky issue. If you’re still working, standard Chapter 7 or 13 still apply, but you need to think about the next 10 years. For example, if you’re planning on living off your retirement fund in only a few years, filing for bankruptcy isn’t a terrible idea since your plan is still protected under law. However, if you need to file Chapter 13, repayment plans aren’t advisable since you’ll have no income coming into your household. Certain rules also vary by state. For example, if you have a lot of debt you’re trying to discharge due to medical bills, it might be wise to do so before retirement. This won’t change your retirement plan dramatically if you opt for Chapter 7, though any money you’ve saved that can be considered assets or disposable income not required for living expenses may be seized. An important question to ask: are retirement accounts exempt from bankruptcy? Yes, but consider what else you might lose. Florida is a very favorable state for retirees who declare Chapter 7 because there are unlimited exemptions on homestead. What that means is that you won’t lose your house, whereas this may not be the case in other states. In short, you need to consider what you’ll lose versus what’s protected in a bankruptcy filing, and how that will impact your lifestyle and expectations in the years to come when you’re in retirement.
The simple answer is: don’t do it. Are retirement accounts exempt from bankruptcy? Yes, most of the time. Can you get ahead by cashing it out ahead of time? No for the most part. By making early withdrawals on your retirement plan, regardless of what type it is, you’re making it non-exempt. Early withdrawals on retirement plans also result in high penalty fees and heavy federal taxes. The bottom line is not to panic if you need to consider bankruptcy and do anything rash. In fact, there are many types of assets and property that may be exempt in a Chapter 7 case. The key is not to make any move or major decisions until you learn the full extent of your rights under the law.
If you’re already living on your retirement fund, this gets a little trickier. However, the funds are still protected. What becomes an issue is that the income you receive from your retirement plan is then in theory susceptible to seizure once it’s in your bank account. What it comes down to is how much a judge determines is needed for living expenses, therefore not leaving you destitute. This is basically the same type of expectation weighed against other assets and how much creditors are entitled to, so essentially your retirement funds shift from being protected while in the plan to fair game once they’ve been paid out to you. In many cases, social security can also work a similar way.
The very first thing you should do is speak with a lawyer to find out exactly what your rights are. Contact Van Horn Law Group today to speak with an attorney free of charge to get started. This will give you a much better sense of what your legal options are. Everyone’s situation is different, especially when your assets become complicated and include different types of accounts that may or may not be exempt. Before proceeding with a bankruptcy or even deciding if it’s the right option for you, register for a free consultation today.
Filing for Chapter 7 or Chapter 13 isn’t right for everyone. Depending on the type of debt you have, your credit score, how much you’re earning or project to earn in the next several years and current account balances, bankruptcy may not be right for you at all. Contact Chad Van Horn today to speak with an expert who can guide you through your options and make a choice that’s in your best interests.
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