Worrying about your retirement is smart. After all, your financial troubles aren’t likely to get any easier as you get older.
Fortunately, you may have less to worry about than you think. If you’re imagining that bankruptcy will completely wipe out your retirement account, it’s time to breathe a sigh of relief. Bankruptcy doesn’t impact retirement that way.
For Those Who Are Not Retired
Money stored in 401(K)s, 403(b), Keough, or other non-IRA retirement accounts won’t be available to creditors, regardless of whether you file Chapter 7 or Chapter 13 bankruptcies. Money stored in any IRA plan is exempt up to $1,362,800 for all IRA accounts combined.
Your retirement accounts may impact your ability to pass the Chapter 7 means test. Voluntary contributions aren’t an allowed expense, for example, for the purposes of calculating your disposable income.
For Those Who Are Already Retired
Those who are already retiring will use the income they draw from retirement funds to determine their means and their ability to repay debts. If you are filing Chapter 7 bankruptcy and are withdrawing more than you need to support yourself that money may become available to creditors.
This will not include your social security benefits unless you owe money on a student loan, child support, alimony, or court ordered crime victim restitution.
Worth noting: if social security is your only source of income you may well be “judgement” proof. Being judgement proof means you don’t have any non-exempt assets for a creditor to seize.
Never pay creditors with retirement funds!
Many creditors will try to pressure borrowers to dip into their retirement funds to pay off debts, especially once those debts have gone to collections. Many people do so out of a sense of guilt or obligation.
Yet for many Americans, paying creditors is really just a black hole. You won’t improve your credit, you won’t receive any benefit, and the original creditor has already received their tax write-off.
Meanwhile you’re removing funds from an account which might have been otherwise 100% exempt. This money is no longer earning interest or serving your ability to build a future.
What about life insurance?
Much depends on the type of policy that you have. If you have a term life insurance policy there’s nothing to worry about. It doesn’t produce any money until you die, which means it’s not giving you any assets for a creditor to take. If anything, you’d record your premium payment as an expense.
However, if you receive life insurance money from someone else’s policy within 180 days of filing for bankruptcy it can become vulnerable to creditors. Timing matters when filing for bankruptcy.
You should also note that whole life insurance policies do have cash value. Nevertheless losing it isn’t a given. Often, we can protect whole life insurance policies by making the proper use of bankruptcy exemptions.
Bankruptcy can save your future.
Once you’ve filed for bankruptcy you can typically live on a lot less because you’ll have eliminated the dozens of monthly payments that make it difficult for you to stay afloat.
Why not schedule a free consultation to see if bankruptcy is right for you?
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