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Will I lose my retirement account in a bankruptcy?

While the United States economy appears to be in a fairly good state at present, there are still many Kentucky residents who are struggling with out of control debt loads.

Many of these individuals could potentially benefit from filing for bankruptcy to get their finances back in order, yet for various reasons, some still hesitate to take the plunge. One of the reasons may be that they worry that their retirement accounts and pensions will be wiped out in a bankruptcy filing. Should they be concerned?

Bankruptcy and retirement pensions

There may be ways to protect your retirement accounts in a bankruptcy filing, dependent upon the type of bankruptcy petition that you file.

Filing for Chapter 13 typically leaves more assets protected from seizure and/or sale than Chapter 7, although some vital assets may still be protected in a Chapter 7 bankruptcy. This is because rather than wiping the slate clean as a Chapter 7 bankruptcy does, filing for Chapter 13 reorganizes your debts, gives you some time to catch up and streamlines your payments.

What you can expect

Most — but not all — retirement account funds are protected in bankruptcy, including 401(k) accounts with employer(s). As long as your 401(k) qualifies under the Employee Retirement Income Security Act (ERISA), your account is protected even if you file for bankruptcy.

But even without ERISA protections, you still could be in the clear. Funds in non-ERISA plans are protected as long as they don't exceed $1,362,800 per individual. However, that amount is subject to change in April 2022.

What about IRAs?

Your IRAs are vulnerable in a bankruptcy, but there are also exemptions. As above, the sum of $1,362,800 per individual is protected. That alone leaves you in good shape for retirement even if you lose any funds over and above that in a Chapter 7 bankruptcy. It should be noted, however, that if you withdraw funds from your IRA, you lose those legal protections and the money can be seized to pay off creditors.

Protect your IRAs in bankruptcy filings

Your Lexington bankruptcy attorney should advise you to avoid at all costs borrowing against your retirement accounts, as you may be able to both get out from under your mountain of debt and protect your pension fund for your golden years.

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Law Office of Ginger C. Cord, PSC
155 E. Main Street
Suite 330
Lexington, KY 40507

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