In contrast with the many negative connotations surrounding it, bankruptcy is a valuable tool for helping individuals overwhelmed by debt. Chapter 7 and Chapter 13 bankruptcy offer them a new start.
However, because of the many misconceptions surrounding it, individuals may have many questions they want answered before using it. One common worry is what happens to retirement accounts during bankruptcy.
Bankruptcy proceedings often afford retirement accounts protection, depending on the kind of plan. Different types of retirement accounts, such as 401(k)s and pensions generally fall into the category of exempt assets. This shields them from creditors’ claims during bankruptcy. The Employee Retirement Income Security Act safeguards employer-sponsored plans. Individual Retirement Accounts often have protection up to a certain dollar limit.
There are exceptions. For instance, contributions made to retirement accounts shortly before filing for bankruptcy may not receive the same level of protection. Additionally, excessive contributions to retirement accounts with the intent to shield assets from creditors could face scrutiny. While traditional and ROTH IRAs have protection under the Bankruptcy Abuse Prevention and Consumer Protection Act, any money in them over the specified limit is fair game for paying back creditors.
USA Today states that consumer debt in 2023 is over $17 trillion. Whether it is from unexpected medical or other emergencies, school loans, credit card bills or other reasons, debt can be a huge burden. Sometimes it is more than an individual or family can handle on their own. Bankruptcy can help relieve it while leaving retirement accounts untouched due to exemptions, with a few exceptions.