Protecting Retirement When Filing for Bankruptcy

Protecting Retirement Whe…

If you are considering bankruptcy, you may be worried that doing so will destroy your nest egg and leave you without funds to pay for your retirement. Find out how Chapter 7 and Chapter 13 bankruptcy treats retirement assets and income, and what to do if you are concerned about bankruptcy in retirement.

Protecting Retirement Assets During Bankruptcy

You don’t have to worry about a bankruptcy ruining your retirement plans. It’s true that Chapter 7 bankruptcy trustees are responsible for selling off many of your assets to satisfy outstanding debts. However, bankruptcy is not designed to leave you destitute. Both the federal and Michigan bankruptcy codes afford protection for retirement plans within their lists of exemptions. Whether you file a Chapter 7 bankruptcy or a Chapter 13 payment plan, you will able to shield:

  • 401(k) and 403(b) retirement assets in employer-provided ERISA plans
  • defined-benefit pension plans
  • SEP-IRAs for self-employed debtors
  • Traditional IRAs up to a combined $1,362,800 as of 2019
  • Roth IRAs up to a combined $1,362,800 as of 2019
  • Keoghs
  • Profit-sharing plans
  • Money purchase plans

A certain amount of your bank and investment account funds may also be protected depending on if you choose to use state or federal exemptions (however this is usually a very small amount).

Can You Shield Assets Using a Retirement Plan or IRA Before Filing for Bankruptcy

As exempted assets, your retirement plans are protected from distribution and are yours to keep after the bankruptcy is discharged. However, that doesn’t mean you should pour assets into these accounts before filing to shield them. Withdrawing funds from a retirement savings account too soon can cause substantial tax penalties. Rather than trying to shelter assets in your retirement accounts, talk to your bankruptcy attorney ahead of time to see what you can do to protect any non-ERISA retirement assets.

Using IRA and 401k Money During Chapter 13 Payment Plans

Debtors who are in Chapter 13 bankruptcy payment plans may be able to use the funds in an IRA or 401k to pay for personal expenses without court approval. Normally, the model Michigan Chapter 13 payment plan requires a debtor to ask the court’s permission before borrowing $2,000.00 or more. This can make getting a new vehicle or paying for an unexpected home repair difficult. If you have an IRA or 401k retirement plan, you may be able to use those funds without asking the court’s permission. This is true even if you take out a loan against these accounts and repay that loan over time. However, you could create other, non-bankruptcy-related problems by doing so. Be sure to review your other options, including a plan modification, with both your bankruptcy attorney and your financial advisor before withdrawing money from a protected account.

Protecting Your Pension Income

Many people face new financial challenges after reaching retirement age. Bankruptcy in retirement often involves large medical debts and increasing housing expenses after seniors move into assisted living arrangements. Pensions and retirement accounts in “payout status” may be treated as income by your bankruptcy trustee or Chapter 13 payment plan. You will still be allowed to keep what you need to support yourself and pay for your current necessary expenses. However, any income above these expenses could be seized and used to satisfy your debts.

This is also true about employee contributions to retirement accounts while you are working. The bankruptcy court may treat this as discretionary income better used to satisfy your existing debts. Be sure to discuss where your money comes from and where it is going with your attorney before filing for bankruptcy.

Special Rules for Social Security Retirement Benefits

If a significant portion of your income comes from Social Security benefits, you should know that your bank is required to follow special rules before turning those assets over to the bankruptcy trustee. Most creditors can’t garnish your social security benefits, but they can be withheld prior to payment for other debts such as:

  • Tax debts
  • Student loans
  • Child support arrearage
  • Spousal support (alimony) payments
  • Restitution to crime victims

Once your Social Security check hits your bank account, it becomes available for creditors. However, since 2011, banks must keep track of those deposits and hold back two months of benefits from creditors when responding to garnishments. This provides a little extra padding and makes sure your necessities are paid for even as you are considering bankruptcy.

Do Retired Seniors Need to File for Bankruptcy?

The closer you get to retirement age, the more concerned you may be about protecting your retirement income. However, you may be worrying over nothing. Many seniors are “judgment proof”. They just don’t have anything for creditors to collect even if they did sue the seniors for unpaid debts and win. Judgment-proof debtors may not need to file for bankruptcy. Discharging those debts may be unnecessary. Instead, seniors may be able to use non-bankruptcy options to minimize creditor calls and make sure your money goes toward giving you a happy retirement.

Still, there may be many valid reasons for seniors to pursue bankruptcy. First, you could simply need relief from the burden of creditor calls and collections efforts. You may also have other assets beyond social security that could be seized by creditors, such as bank accounts, vehicles, or even your home. That is why it is a good idea to discuss your complete financial situation with a bankruptcy attorney before deciding whether filing is the right choice for you.

At John A. Steinberger & Associates, P.C., we know how important saving for your retirement can be. We will work with you to weigh the Michigan and federal exemption options, along with the chances creditors will be able to collect on your debts, so you can decide how to best protect your retirement assets. We are a full-service bankruptcy law firm in Southeast MI. We serve debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.