There is a common misconception that bankruptcy will cause you to lose everything, including your retirement savings. First and most importantly, bankruptcy is for people who have assets they want to protect. Second, bankruptcy can protect your retirement savings from difficult financial situations.
Depending on the type of retirement plan you have, the entirety of or most of your retirement savings are protected when filing for bankruptcy. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was passed. The law protects many different types of retirement plans from creditors, such as 401(k), 401(b), defined benefit pension plans, IRAs, profit sharing plans, money purchase plans and ESOPs.
If you have an ERISA-qualified plan, you may keep the entirety of your savings. ERISA, or the Employee Retirement Income Security Act, was a law passed prior to the BAPCPA.
If you have a traditional or Roth IRA, you may keep a specific amount of your retirement savings. As of 2016 this amount is $1,283,025. The amount exempt from the bankruptcy estate changes every three years. Simple IRAs (for the self-employed) are entirely protected.
Can Waiting to File Bankruptcy Hurt Your Retirement Savings?
Waiting to file for bankruptcy may be much more damaging to your retirement savings. There may be a temptation to use your retirement funds to pay past due bills. Raiding your retirement account to cover past due mortgage payments or medical bills may prove to be a costly mistake in the long-run.
Filing for bankruptcy may reduce the amount of debt owed, and can prevent foreclosure and halt other collection attempts. You may be able to discharge the majority of your debts while keeping your retirement savings.
By speaking with a Kansas City bankruptcy attorney at The Sader Law Firm, you can discover options for reducing or discharging debts while protecting your retirement. Keep reading our blog for future updates debunking other bankruptcy myths.