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

EH Law Group Oct. 18, 2023

The thought of filing for bankruptcy can be unsettling, to say the least. It's a decision that carries significant weight, and it's natural to worry about the potential impact on your financial future. Most importantly, you might be wondering what will happen to your retirement accounts. After all, these are funds you've worked tirelessly to accumulate over the years, intending to secure a comfortable post-retirement life. 

At EH Law Group, we're here to ease your concerns. Our empathetic attorneys are well-versed in the nuances of bankruptcy law, particularly as it pertains to your retirement accounts. We have over 30 years of combined experience, and we're committed to providing you with the detailed attention you deserve.  

As a local practice serving San Mateo, California, and the surrounding areas, we're deeply familiar with the unique financial challenges our community faces. We don't just work here; we live here too. And we're committed to using our knowledge to help our neighbors navigate their unique situations. 

In this blog post, we'll delve into some key points about bankruptcy and retirement accounts. We'll discuss which retirement accounts are typically protected in bankruptcy, situations in which they might not be, and how retirement benefits being paid as income can affect things. We hope this information will provide some clarity and reassurance. Remember, we're here for you every step of the way. 

Retirement Accounts That Are Protected in Bankruptcy

The average age of individuals filing for bankruptcy is 40.9, a period in their lives when they usually have already accumulated a significant retirement fund. So it makes sense that one of the most common concerns we hear from our clients considering bankruptcy is whether they'll lose their hard-earned savings. 

Here's some reassuring news: in both Chapter 7 and Chapter 13 bankruptcies, most retirement accounts—like your 401(k), 403(b), profit-sharing and money purchase plans, and defined-benefit plans—are generally safe. These are considered exempt assets and are not accessible to creditors.  

You definitely should not dip into your retirement savings to pay your debts before filing for bankruptcy. Doing so could result in the loss of both that money and other assets. Generally, when you file for bankruptcy and appropriately identify your savings as exempt, they will be protected from debt collectors. 

The types of retirement accounts typically shielded from creditors include qualified employer-sponsored plans, such as your 401(k) or a pension plan. Also, Individual Retirement Accounts (IRAs) are generally protected in bankruptcy, up to a certain limit. So, breathe a sigh of relief knowing that the nest egg you've been diligently building over the years will likely be safe. 

Are There Situations in Which Retirement Accounts May Not Be Protected?

While it's comforting to know that many retirement accounts are protected in bankruptcy, it's important to understand that there can be exceptions. In some cases, retirement accounts may not be fully shielded from creditors. 

One instance is when your IRA exceeds the set protection limit. As of the date of this writing, IRAs (both traditional and Roth) are protected in bankruptcy up to a total value of about $1,512,350 per person. Any amount exceeding this limit is not shielded and can be accessed by creditors. This cap is adjusted every three years for inflation. 

Also, retirement funds that have been withdrawn prematurely or that are being paid out as income are generally not protected in bankruptcy. This means that if you've taken a lump-sum distribution from your retirement account, or if you're receiving regular payments from the account, these funds could potentially be accessible to creditors. It's worth noting that this doesn't apply to all types of retirement income, so it's important to consult with an experienced bankruptcy attorney to understand exactly how your specific situation might be impacted. 

Furthermore, if you've engaged in fraudulent activity or improper conduct regarding your retirement savings, such as intentionally transferring funds into your retirement account to shield them from creditors, those funds could be seized. It's crucial to approach bankruptcy proceedings with full transparency and under professional guidance. 

Finally, not all types of retirement accounts are protected. For instance, funds stored in simple savings accounts, investment accounts, and certain types of annuities may not enjoy the same level of protection as qualified employer plans or IRAs. It's crucial to be aware of these distinctions when considering bankruptcy and planning for your financial future. Always seek professional advice to ensure you're making informed decisions about your retirement savings and bankruptcy. 

Retirement Benefits Being Paid as Income

Another aspect we'd like to highlight is about retirement benefits being paid as income. While the retirement account itself may be exempt, the income you receive from that account might not be entirely protected. 

For example, if you're receiving regular distributions from your retirement account as income, the bankruptcy court may require a portion of that income to be used to repay creditors. The specific amount will depend on various factors, including your income, expenses, and the type of bankruptcy filing. 

Consult an Experienced Bankruptcy Attorney

Navigating the bankruptcy process can be daunting, but you don't have to face it alone. At EH Law Group, we're here to help. Our attorneys, Eddy Hsu, Grace Ho, and Tina Phan, are dedicated to giving you the detailed attention you deserve. Located in San Mateo, California, we serve clients throughout the surrounding areas, including San Francisco, Santa Clara County, Oakland, Daly City, and South San Francisco. Don't hesitate to reach out to us with any questions. We respond quickly, and your financial well-being is our priority.