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Retirement plans during bankruptcy – What happens to the account?

Retirement plans

In general the money you put into the retirement accounts stays protected, even if you file bankruptcy. So, irrespective of the Chapter under which you are going to file bankruptcy, it won’t have any effect on your retirement accounts. The amount your creditors can get after your file bankruptcy does not depend on your retirement account and the amount contained in those. However, you will have to make sure that you are aware of what the effect of bankruptcy would be on the retirement accounts.

Retirement accounts and bankruptcy

With the exception of just a few accounts, most of the retirement accounts are exempt from any kind of withdrawal even if you file bankruptcy – Chapter 7 or Chapter 13. The accounts which are exempt are the likes of the Keoghs, the 401(k)s and the 403(b)s, IRAs (all types – the simple, the Roth, and the SEP types), the profit-sharing plans, money purchase plans, and the defined-benefit plans.

When you file Chapter 7 bankruptcy, all of your assets are liquidated in order to pay off your creditors and lenders. On the other hand, when you opt for Chapter 13 bankruptcy, you are required to make payments on the debts based on the plan as outlined by the bankruptcy court. However, none of your assets are used to pay off the creditors and lenders, even if you file bankruptcy.

Why does this happen? As per the federal law, the tax exempt accounts designed especially for retirement are also exempt from the bankruptcy. The amount that is exempt is actually unlimited and therefore, you can get exemption on the entire amount which is in your account. However, this total exemption is not available on the IRA accounts – both the traditional and the Roth IRAs. The amount which you can save in case of the IRA accounts is $1,1245,475. This is true with respect to Chapter 7 bankruptcy. If you are going to file Chapter 13, not even a penny is going to be used toward bankruptcy payments.

Some of the most important things which you need to keep in mind and avoid doing with your 401 (k) account, if you are thinking of filing bankruptcy are:

  1. Avoid cashing in your 401 (k) account or else the money exempt will no more be the same. The money which is in the 401 (k) account is completely exempt from bankruptcy liquidations. However, once you take out the money from it to use it for any other purpose, it no more stays exempt, as before.
  1. People generally believe that it is always better to convert non exempt assets into normal assets like that of 401 (k) accounts to savings accounts or vice versa, before going on to declare bankruptcy. However, this is not good as the bankruptcy trustee and the bankruptcy court can consider this move as one which is done to defraud your creditors and lenders.
So, you can see that the retirement accounts stay out during bankruptcy filing and thus the money within the account remains exempt.

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