Will I Lose My Retirement Accounts if I File for Bankruptcy?

According to a study by the Federal Reserve Bank of Boston, only 35 percent of credit card holders pay off their full balance each month. The Federal Reserve Bank of New York places total credit card debt in the U.S. at nearly a trillion dollars -- $986 billion in the first quarter of 2023 – the highest total since it began tracking consumer debt in 1999.  

Also, the American Bankruptcy Institute (ABI) reports a 23 percent increase in bankruptcy filings in May 2023 from May 2022. Most Americans view bankruptcy as a lose-lose proposition -- they fear losing everything, including their credit, possessions, reputations, and even retirement accounts.  

However, that is far from the truth. Bankruptcy is a federally protected right that gives those who use the option a fresh start in life, often retaining most if not all of what they currently possess, including those hard-earned retirement savings. 

There are two routes to discharging unsecured debts – reorganization and liquidation. Both will allow you to retain your qualified retirement savings, though you should also take a savvy approach to your debt obligations to shield your retirement savings.

If you’re located in the New Jersey areas of Middlesex, Somerset, Morris, Passaic, Essex, and Bergen Counties, or anywhere else in the state, and debt is overwhelming you, contact the bankruptcy attorneys at Schwartz, Hanna, Olsen, & Taus, P.C. for trusted legal assistance.  

We have a combined eight decades-plus experience in helping individuals and families navigate the bankruptcy system to secure a fresh start in life and leave their burdensome unsecured debts behind. You will be provided personalized and compassionate representation as you work through your financial difficulties. 

Retirement Accounts and Bankruptcy: What’s Protected 

As noted briefly above, there are two types of bankruptcy for individuals and families. One is Chapter 13, and the other is Chapter 7. 

Chapter 13 is a reorganization plan – also known as the wage earner’s plan – that uses disposable income to pay, at least partially, the unsecured debts you owe. Disposable income is calculated after factoring in the essential costs of living – including home, car, health care, food, education, and more. 

What’s left is given monthly to the bankruptcy trustee assigned to you, who will parcel it out among your unsecured creditors. If you have secured loans for a home or car, you must continue to pay those. In three to five years, you will be discharged from your unsecured obligations. 

Chapter 7 is the liquidation option, which sounds scary, but exemptions allow you to keep a lot of what you own given equity limitations. The trustee is allowed to sell off some of your possessions to satisfy, at least partially, the debts you owe. The process is much quicker than Chapter 13 and can be over in a few months’ time.   

Under both plans, your qualified retirement plans cannot be touched. Qualified means they are under protection through the Employee Retirement Income Security Act (ERISA). These plans include 401(k)s, 403(b)s, IRAs, Keoghs, profit-sharing plans, money purchase plans, and defined-benefit plans. Note, however, that for IRA, each person is limited to $1,152,350 in total exemption – not per IRA, but all factored together. 

Withdrawn Retirement Benefits Aren’t Necessarily Exempt 

If you withdraw funds from your retirement account, they can be subject to bankruptcy action. For instance, if you receive a monthly payment from a pension or retirement account, the court will consider it income. If this income is needed for your support in living your life, the court won’t touch it, but if it exceeds what you need, it can be used to repay creditors. 

Also, if you’re facing debts that are out of hand, you may think it a good idea to withdraw retirement savings to help pay your monthly obligations. This is probably not a good idea. Your future savings will be tapped, and you will probably need bankruptcy protection at some point soon anyway. Before using retirement funds for paying debts, consult with trusted bankruptcy attorneys. 

You Deserve Clear Answers 

When debt is out of control – you’re paying the minimum, juggling payments between creditors each month, or bill collectors are constantly harassing you – it’s time to take action and weigh your bankruptcy options. You deserve a fresh start, and federal and state bankruptcy laws give you that chance.    

If you’re located in the New Jersey areas of Middlesex, Somerset, Morris, Passaic, Essex, and Bergen Counties, or anywhere else in the state, and debt is overwhelming you, contact us at Schwartz, Hanna, Olsen, & Taus, P.C. for legal advice. We will discuss your financial situation, and inform you of your best options.