When you declare bankruptcy, many of your assets may be up for grabs by the court. The difference will depend on whether you file for Chapter 7 or Chapter 13 bankruptcy.
The good news is that you will not lose all your property in bankruptcy. Most of the time, your retirement accounts are protected from your creditors. The important thing is that you do not want to withdraw money from those accounts after you file for bankruptcy.
The Accounts Covered by ERISA
Accounts that come under the Employee Retirement Income Security Act (ERISA), AllLaw says, are protected from the bankruptcy court. ERISA does not protect all 401(k)s and other retirement plans. To be sure, you need to check with your employer.ERISA Does Not Cover Some Retirement Plans
Most 401(k)s are covered by ERISA if offered by an employer. Other plans are not covered, including IRAs and state-employee pensions. Plans such as simplified employee pensions (SEPs) and most 403(b)s are also not covered.TheBankruptcySite says that although ERISA does not cover IRAs (including Roth IRAs, SEP IRAs, and SIMPLE IRAs), exemption amounts usually protect them from bankruptcy trustees.
Chapter 13 Bankruptcy
When you file a Chapter 13 bankruptcy, you can keep all your assets, including your home and car. You will be required to make payments to your creditors, the size of which the bankruptcy court will determine.In addition to making payments to your creditors, you are also responsible for payments on your normal living expenses, including mortgages and car payments. If you do not, the court may permit foreclosure or repossession.
Chapter 7 Bankruptcy
If you file a Chapter 7 bankruptcy, your options are limited. The court will take and liquidate your more valuable assets to pay your bills and leave you with little to live on. However, the good news is that once that procedure is finished, it will wipe away any remaining debt—particularly non-secured (credit card) debt.Some Exemptions Are Allowed
The court will consider all your income, assets, and disposable income to determine how much you can pay. Various types of assets often qualify for an exemption, which means a creditor cannot take those assets away from you. Federal exemptions may apply to certain types of assets, and exemptions from the state you live in may also apply.Retirement plans are protected, but only up to a certain amount. SmartAsset says that after April 1, 2022, the cap was set at $1,512,350. Every three years, it is recalculated, making April 1, 2025, the next time.
States also will usually permit you to exempt most government payments such as Social Security, veteran’s benefits, disability payments, and public assistance. Life insurance payments and alimony payments are also usually exempt.
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In a lawsuit mentioned by Forbes, a woman had filed for a Chapter 13 bankruptcy. The creditor complained that she should not be allowed to make future contributions to her retirement plan.
When you file a Chapter 13 bankruptcy, you agree to make payments for what is owed to the creditors and are usually given a three- to five-year period to pay it back. Although the creditor tried to stop her regular contributions, even though she was only 30 years old, she was permitted to keep making contributions—mostly because she had been making them for some time.
Other court cases may rule differently, depending on the circumstances. The outcome may also depend on laws within the state, which will vary according to the state where you live.
Accounts Not Protected
If an exemption does not apply, other accounts may not be protected. Experian says that creditors may be able to obtain money to pay bills from regular savings accounts, investment accounts, brokerage accounts, and stock option plans. It will not matter even if you say the money in those accounts is part of your retirement savings.When you are in a bankruptcy situation, do not withdraw money from your retirement plan; your withdrawals are unprotected. TheBankruptcySite advises that you not withdraw money from your retirement accounts to pay bills before filing bankruptcy.
Your 401(k) Is Protected If Your Company Goes Bankrupt
You put money into your company’s 401(k) plan for years, and then your company declares bankruptcy. When that happens, the 401kHelpCenter says that if the 401(k) was covered by ERISA, then your money is protected. Any matching funds put into your account by the employer are also covered. All the money gets put into a trust account. Your employer does not control the assets for you.Fill Out Chapter 7 Papers Carefully
When you file for a Chapter 7 bankruptcy, you will fill out forms listing all your income, bank accounts, assets, retirement accounts, investment accounts, etc. Nolo warns people against leaving information off or falsifying information when filing. If you do, you may be subject to criminal fraud penalties, possibly including a fine of up to $250,000, 20 years in prison—or both. The FBI investigates these cases.When you file for bankruptcy, there are some fees you must pay. USCourts.gov says there will be a $245 fee for case filing, a miscellaneous administrative fee of $75, and a trust surcharge of $15. The fees can be divided into four payments. If you fail to make them, the court will likely drop your case.
The laws concerning bankruptcies vary by state. Federal and state exemptions may be available, but only an experienced bankruptcy lawyer can provide the best information and guide you to the best options. Contact a lawyer before the case goes to court to ensure you do not make mistakes you will regret later.
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