If you’re like most people, the idea of something happening to your retirement funds is anxiety-inducing. After all, you’ve worked for years to help build up funds to support you later in life. As such, if you’re considering filing for bankruptcy, understanding if this process will impact your 401(k), IRA, or other retirement plan is critical. The following blog explores what you should know about these matters and why working with an Orange County consumer bankruptcy lawyer is in your best interest to help protect your assets during this process.
Will Filing Bankruptcy Impact My Retirement Accounts?
When you file for bankruptcy, the idea of assets being seized can be incredibly scary. However, it’s important to understand that there are protections in place to help ensure you can retain certain assets. These are considered protected assets. Some assets are federally protected while others can be shielded using state and wildcard exemptions.
Generally, your retirement plans are protected when you file for bankruptcy because they ensure your long-term well-being. This includes Employee Retirement Income Security Act (ERISA) plans and some IRAs protected under the Bankruptcy Abuse Prevention and Consumer Protection Act. You do not have to worry about money being seized from these accounts to repay creditors, regardless of whether you file Chapter 7 or Chapter 13. However, traditional and Roth IRAs are only protected up to a certain point. If the funds held in these accounts exceed these limits, the excess funds can be used to pay creditors.
Can I Use My 401(k) to Pay Creditors?
In some instances, you may want to use the funds from your 401(k) or IRA to pay off creditors to avoid bankruptcy. However, it’s important to understand the downsides of this option.
If you take funds from your retirement account before you are old enough, you can face a 10% penalty on any withdrawals. Additionally, you’ll lose interest and protections on the account if you withdraw funds to use to pay off creditors rather than filing for bankruptcy.
However, if you wish, you may be able to use funds from your retirement account to pay a single creditor in Chapter 7. You should not do this unless you’ve discussed the option with a skilled bankruptcy attorney, as this can cause considerable issues in your case if you’re not careful. While you may want to utilize funds from your retirement account to help keep a car that you’re behind on payments for instead of having it seized by creditors, the trustee can consider it a preferential transfer. If you pay off one creditor fully and not another, it can result in the court voiding the payment and liquidating the asset. As such, you must discuss your options with an attorney first.
Bankruptcy is not a process that should be taken lightly as it can have a considerable impact on your finances. However, you can rest assured that you will not have to sacrifice the funds you’ve worked hard to procure for your future. At the Law Offices of Michael D. Pinsky, P.C., we understand how overwhelming bankruptcy can be due to the important considerations that must be made. That’s why our firm is dedicated to guiding you through this complicated process. Contact our team today to learn how we can help you through this process to receive financial relief.
