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Can I Continue to Pay Into a Retirement Account Under Chapter 13?

EH Law Group Feb. 22, 2024

One of the questions we often hear at EH Law Group is whether it's possible to continue making voluntary contributions to retirement accounts during a Chapter 13 bankruptcy. The answer isn't as straightforward as you might think. In fact, courts across the country don't always agree on this issue. 

Some courts view these contributions as reasonably necessary expenses. They understand that planning for your future is important and that continuing to contribute to your retirement account can provide some financial stability in your later years.  

Other courts, however, see things differently. They don't consider these contributions to be essential expenses, which means they could potentially impact the amount you're required to repay your creditors. 

Retirement Contributions Reduce Payments to Creditors 

Chapter 13 bankruptcy involves repaying creditors over a three to five-year period based on your disposable income—the money left after deducting your necessary living expenses.  

When you contribute to a retirement account, that's less disposable income available to repay creditors, and they may argue that those funds should be directed towards your debts. Consequently, if a court doesn’t consider retirement contributions a necessary expense, your payments to creditors might increase, which can tighten your budget even further.  

Consulting with a bankruptcy attorney to navigate this complex issue is, therefore, essential to make informed decisions that align with your long-term financial stability. 

When Is Retirement Considered a Necessary Expense? 

A necessary expense under bankruptcy law typically refers to costs that are considered essential for maintaining a basic standard of living while undergoing the bankruptcy process. These expenses include food, shelter, utilities, transportation costs, and critical healthcare needs.  

Courts determine which expenses are deemed necessary by evaluating whether they are reasonable and whether the individual cannot maintain a minimal lifestyle without them.  

In the case of retirement contributions, the court has to consider whether these expenses are crucial to supporting the long-term welfare of the filer and whether foregoing them would present significant challenges post-bankruptcy. 

For instance, if you're approaching retirement age, the court might view retirement contributions as a necessary expense because they're essential for supporting your financial needs during retirement. Conversely, if you're still young and have many working years ahead of you, the court may be more likely to consider these contributions as optional expenses. 

Is Bankruptcy the Right Path for You? 

Deciding whether or not to file for bankruptcy is a deeply personal and complex decision, and it might not be the right path for everyone, especially for individuals who are primarily focused on their retirement savings.  

For these individuals, the restrictions on retirement contributions during Chapter 13 proceedings could significantly disrupt their long-term financial planning. Those who have a considerable amount of time before retirement may find themselves at a crossroads—choosing between immediate debt relief and the stability of their future.  

Furthermore, bankruptcy can also impact credit scores, limiting the ability to secure future loans which may be necessary for unexpected life events or even retirement plans. Credit considerations and the restrictions imposed on retirement savings speak to the importance of consulting with financial advisors and bankruptcy attorneys to explore all available options. That way, you can craft a strategic, personalized plan that supports both current financial rehabilitation and future financial goals. 

Bankruptcy is often used as a last resort, so if you have other options available, it's crucial to explore them before making a decision. Our attorneys at EH Law Group can help you no matter where you're at in the process.  

Will I Lose My Retirement Savings if I File for Bankruptcy? 

The good news is that retirement accounts are typically protected during bankruptcy proceedings. This means that even if you file for bankruptcy, your retirement savings will likely remain untouched. 

However, as mentioned earlier, the amount of disposable income available to contribute towards your retirement account may be affected by the Chapter 13 repayment plan. Therefore, it's essential to consult with a bankruptcy attorney to understand the potential impact on your retirement savings before making any decisions. 

Secure Trustworthy Legal Counsel 

Deciding to file for bankruptcy isn't a decision to be taken lightly. It can have far-reaching implications for your financial future. That's why it's crucial to consult with a knowledgeable bankruptcy attorney in your area before filing your case. At EH Law Group, we're well-versed in the specific rules and practices of our bankruptcy jurisdiction in the Bay Area. 

Our attorneys bring over 30 years of combined experience to the table and have helped countless Bay Area residents navigate their way through Chapter 7 and Chapter 13 bankruptcy cases. 

Remember, bankruptcy isn't a sign of failure—it's a legal tool designed to give overwhelmed individuals a fresh start. Whether you're dealing with creditor harassment or foreclosure, or just need help settling your debts, we're here for you.