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Can you lose retirement savings by filing for bankruptcy?

Fear of the unknown is a powerful motivator for many people. For those overwhelmed by massive debt, many are afraid they’ll lose everything they own when filing for bankruptcy, including retirement savings and even Social Security benefits.

That fear often leads them to do nothing, which is usually the worst thing they can do. In reality, most retirement funds aren’t touched. However, it all depends upon when they file as well as the type of bankruptcy.

Filing before retirement

The good news is strict protections are in place to keep you from losing retirement funds if you file for Chapter 7 or Chapter 13 before you retire. Some defined-benefit plans and other accounts can’t be touched by creditors at all. These include:

  • 401(k)s
  • Keoghs
  • 403(b)s
  • 457(b)s
  • Profit-sharing plans

IRAs are a different story. Accounts such as Roth IRAs, SEP-IRAs or SIMPLE-IRAs cannot be touched up to a limit, which is $1,362,800 for all IRAs combined. That threshold is in effect until April 1, 2022. The amount adjusts for inflation every three years.

Filing after retirement

Once a person retires and begins drawing from retirement accounts, creditors have more access to those funds. The key determinant is gauging the income you need for living expenses. Creditors can tap into anything over that amount if you file for Chapter 7.

Chapter 13 is more complex as it establishes a court-approved repayment plan over three to five years. Income from retirement accounts is typically included in determining the amount for the repayment plan.

What about Social Security benefits?

Federal law prohibits creditors from garnishing Social Security payments. However, money can be deducted from your check for paying specific debts, such as federal taxes, student loan debt, alimony and child support or restitution to a crime victim.

The good news here is that once a Social Security check is deposited into your account, it can’t be touched by creditors. Furthermore, a 2011 law requires banks to ascertain whether federal benefit funds are included in a depositor’s account before any money can be seized.

Charting a course for financial stability

Bankruptcy can be complicated. If you feel crushed beneath a wave of debt, consulting an experienced bankruptcy attorney can provide relief. Your lawyer can suggest a personalized plan to discharge medical bills, credit card debt, past-due mortgage or rent amounts and other obligations.

Your lawyer will help protect your retirement while determining whether you qualify for Chapter 7 bankruptcy or if Chapter 13 is the best fit for your situation. They will also help you understand the benefits and what to expect once those debts are discharged.

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