Chapter 7 bankruptcy is also known as liquidation bankruptcy. It gets that name from the fact that the courts can order the liquidation or sale of certain assets to repay your creditors. To prevent abuses of bankruptcy filings, the courts can sell the assets of those filing to help repay creditors.
The knowledge that certain assets are vulnerable to seizure leaves some people unwilling to consider Chapter 7 bankruptcy as a solution to their debt issues. These people may not realize that the state of Ohio does have protections in place for residents with overwhelming debt. Provided that you pass the means test and therefore qualify for Chapter 7 bankruptcy, there are specific assets that you can protect from liquidation when you file.
You can protect a certain amount of equity in your home, as well as assets that you need to conduct your business. Liquid capital such as savings accounts may be more vulnerable to liquidation. However, pensions and retirement accounts are different than liquid capital.
How does Ohio handle your retirement savings or pension?
Retirement is a potentially expensive endeavor, even if you have contributed to Social Security for your entire adult life. A properly funded retirement account or employer-sponsored pension can make the difference between needing to continue to work through your golden years and having the ability to enjoy the later decades of your life comfortably.
The pension you have accrued at work, as well as any funds you or your employer contributed to a retirement account, will help you close the gap between what Social Security provides for you and what your actual cost of living is. Without retirement savings, you may struggle to cover the basic costs of living as a senior citizen.
Ohio wants to protect its citizens from needing to work until they die or absolute poverty in their later years. Your entire pension and retirement savings account will likely have protection from liquidation when you file for chapter 7 bankruptcy. That means the state will not require the liquidation of a retirement account or pension for the benefit of your creditors.
You shouldn’t pull money out of your retirement account to pay debt
When people are struggling to pay off debt, whether they have medical expenses or large balances on credit cards, they will often borrow money from one place to take care of obligations in another.
Given that a significant amount of your home equity receives protection in bankruptcy filings and that the full balance of your retirement account has the same protection, it doesn’t make sense to borrow money from those protected funds in order to repay a debt you could discharge in bankruptcy.
Before you make a choice that could undermine your ability to retire, you may want to really explore your options under Ohio bankruptcy laws.