Some people refer to Chapter 7 bankruptcy as liquidation bankruptcy. That nickname comes from the obligation to sell off certain assets or liquidate them to repay creditors. Before the filer is eligible for a discharge of the balance that remains on the account, they must sell off non-exempt assets or pull money from bank accounts to repay as much of their unsecured debts as possible.
Filers can protect certain resources using exemptions, including a certain amount of home equity, tools they use for work and personal property. For many people, their retirement savings may come close to the value of their homes.
Do people risk the loss of their retirement savings when they file for Chapter 7 bankruptcy?
Dedicated accounts may be exempt
The good news for those facing financial hardship and contemplating bankruptcy is that they may be able to preserve most or all of their retirement savings. Federal rules extend robust protections to retirement funds saved in specialized accounts.
Any savings theoretically governed by the Employee Retirement Income Security Act of 1974 (ERISA), including pensions and 401(k)s, are typically exempt during bankruptcy and have protection from all creditor claims. There are limits to how much people can preserve if they use IRA accounts for their retirement savings, but even then, exemptions allow them to protect over a million dollars in savings.
Those concerned about their retirement resources may need to their situation with a skilled legal team to determine if bankruptcy might endanger some of the resources they expect to rely on during their golden years. Discussing plans for Chapter 7 bankruptcy and assets that could be vulnerable can help people explore the exemptions available to them. An attorney can often help filers maximize their exemptions and financial protection.
