Retirement account exemptions in bankruptcy

The idea of starting over financially may seem appealing to many people struggling with debt in Louisiana. However, if you have a sizable retirement account, beginning from scratch at this point in your career may feel terrifying.

At Simon Fitzgerald LLC, we understand that fear and can offer reassurance about the many bankruptcy exemptions that protect people’s retirement accounts and other assets.

During Chapter 13 bankruptcy, the focus is on creating a debt repayment plan, so you do not have to worry that the bankruptcy trustee will liquidate your retirement assets. The Motley Fool, a consumer financial education resource, explains that even in Chapter 7 bankruptcy, your retirement accounts are not likely to be raided to pay your outstanding debts.

401(k) accounts

Not every 401(k) has protection from bankruptcy through the law, but most do. Plans that qualify under the Employee Retirement Income Security Act are safe.

If your plan is not qualified under ERISA, you do not need to panic. There is still the federal exemption protecting your account. The limit on this exemption (at least until 2022) is $1,362,800 per person. Any money beyond this amount in your account may be used to pay back your creditors.

Traditional and Roth IRAs

IRAs are not protected under ERISA, so they are vulnerable to creditors in bankruptcy. However, the exemption for these is also $1,362,800.

Keep in mind that while money in your retirement accounts may be safe, money you withdraw is not safe from your creditors. Your cash on hand and money in your bank accounts must go to the trustee to pay your debts in Chapter 7 bankruptcy. In Chapter 13 bankruptcy, it may count as income that will help determine the size of your payments.

More information about bankruptcy exemptions and retirement plans is available on our webpage.