Can Creditors Touch My Retirement & 401k Funds
Most of your retirement funds such as 401ks and other qualified retirement accounts are protected from creditors and untouchable by a bankruptcy trustee. Since these funds are protected by federal bankruptcy laws, it is rarely a good idea to cash in your retirement accounts to pay off your debts.
In aChapter 7 bankruptcy, most retirement accounts are classified as exemptions under the Bankruptcy Code. That means these accounts cannot be liquidated to pay your creditors. UnderChapter 13 bankruptcy, none of your assets are taken from you. The monthly repayment plan amount is determined by your income. Your retirement savings are only included in this amount if you want them to be.
Let Us Help With Your Estate Planning
As you move on through life and accumulate 401k/IRA funds, presumably you do not intend that your life savings should be lost to a bankruptcy court trustee for distribution to creditors. Just as we have discussed above, if you leave 401k/IRA funds to a beneficiary at the time of your death without planning, your beneficiary could lose the funds you designate for that beneficiary if that person is experiencing financial problems that ultimately lead to a filing for bankruptcy protection.
Who can draft an Accumulation or Conduit trust to protect the 401k or IRA funds for an estate? Traditionally, estate planning attorneys who regularly draft wills and trusts establish these trusts. However, many bankruptcy attorneys like myself can affordably draft a spendthrift Accumulation/Conduit trust designed to keep your 401k/IRA funds from being ripped from the hands of your loved ones.
. If you need a spendthrift Accumulation or Conduit trust to shelter IRA or 401k funds, we are pleased to provide that service. If you are ready to revise your will and estate plan, then I can help with that task as well.
If I File Bankruptcy What Happens To My 401
In most cases, if you file bankruptcy what happens to your 401 is that it will not be affected by the bankruptcy. The reasoning behind this is that if your bankruptcy forced you to lose any retirement savings you had earned in order to pay off creditors, then bankruptcy could never truly offer a fresh start as Congress intended since you would have no money saved later in life and you might end up in dire financial straits again when you stopped working.
This would be good for no one not you and not society at large and so, Congress has carved out the protections of properly-qualified retirement accounts as detailed in this article.
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Exemption Of Child Support Payments From Garnishment
Some clients want to know if child support payments are exempt from garnishment.
For example, suppose a mother receives child support payments from her ex-spouse. The mother does not work and does not have any separate income. The mother uses some of the child support payments to support the children that live with her. The mother saves the remaining amount of child support payments in her personal bank account.
The mother has a monetary judgment against her. Can the judgment creditor garnish the funds in the bank account?
In that situation, the funds are likely exempt. The head of household exemption exempts money earned from someone who is head of the family. The exemption applies to funds held in a bank account for up to six months.
In the above example, the money was earned by the head of household, who is the ex-spouse and was subsequently deposited into a bank account. Even though the mother is not the wage-earner, she can still probably claim that the funds are exempt. Further, this result matches the purpose of the law, which is to not leave the family, and in this case the children, destitute and reliant on the state.
Is My 401k Protected From Bankruptcy
In most cases, your 401k is protected from bankruptcy. However, its important to work with an experienced attorney when filing because every state has different laws and exemptions.
Bankruptcy protection doesnt apply to all retirement savings. Bankruptcy laws are complicated and 401k savings and other assets. Working with an expert who understands the laws affecting your case is an essential part of achieving bankruptcy success.
Heres what you need to know about how bankruptcy affects your retirement savings.
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Difference Between Property Excluded From The Bankruptcy Estate And Exempt Property
When you file for bankruptcy relief, almost all property you own becomes property of the bankruptcy estate. When an asset is property of the estate, the bankruptcy court has the power to administer it in your case.
If an asset is property of the estate, you must be able to protect it with a bankruptcy exemption if you want to keep it. In Chapter 7 bankruptcy, the bankruptcy trustee can take or sell your nonexempt assetthe property that isn’t protected by an exemptionand distribute the proceeds to your creditors.
Assets that aren’t property of the estate are safe in bankruptcy and can’t be administered by the court. Most retirement accounts are protected in bankruptcy because they are either not property of the estate or they are exempt.
Discussing The Establishment Of A Protective Trust With A Benefactor
Realistically, a frank financial discussion between a benefactor and a beneficiary is awkward at best and a cultural taboo at worst. Most folks are quite embarrassed to discuss a future gift or inheritance with a benefactor, getting started is often the hard part.
Few of us would start a conversation like this, Dear Mom and Dad, I am having financial difficulties. If you have IRA/401k funds you intend to leave to me at the time of your death, you need to create a trust to protect those funds from loss in the event I end up filing for bankruptcy protection. You should call James MaGee to set up an appointment to draft a spendthrift Accumulation/Conduit trust.
While it could be difficult to talk to your potential benefactor about estate planning, avoiding an initially awkward discussion with your benefactor could prove exceptionally costly and might result in events harmful to your benefactors wish that their estate directly benefit you and the benefactors other heirs.
Most benefactors are unlikely to know whether an Accumulation/Conduit Trust should be set up for you unless you tell your benefactor. Perhaps a way to take the initiative and avoid some of the awkwardness is to ask your benefactor to read this article to establish a foundation for your conversation about estate planning.
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Filing For Bankruptcy After Retirement
If you are already using your retirement accounts and receiving retirement income, then bankruptcy will affect you differently. Depending on which Chapter you file, you should consider your total income between your retirement income and funds when it comes to:
- The monthly payments for a Chapter 13 repayment plan
You can still qualify for either of these bankruptcies even if you are retired. Keep in mind your Social Security benefits are not income, and do not play a part in either type of bankruptcy.
Bankruptcy And 401 Savings
First, its important to understand how bankruptcy affects a 401 savings plan in general.
As long as your 401 is ERISA qualified, it will be protected when you file for bankruptcy. For many people filing for bankruptcy, their 401 savings is their biggest asset, so this protection is great news.
Furthermore, its not just 401 plans that are protected, but nearly all employer-sponsored retirement savings plans.
Your bankruptcy attorney will review your retirement savings information and discuss with you what is protected and what isnt, but in general, you can breathe a sigh of relief when it comes to the funds youve saved for retirement.
For more information about bankruptcy and your retirement savings, check out this article from The Balance.
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Where Are Debtors Assets Located
It is important to determine where certain assets are legally located in order to understand the exemption and collection law applicable to the asset.
The location of real property is obvious. But some debtors effectively relocate foreign real estate by owning the property in an LLC. The debtors then hold the LLC interests as personal property in Florida.
In this manner, the debtor owns moveable LLC interests in Florida, subject to Florida laws, rather than owning the underlying real property situated outside Florida.
Asset location is an issue primarily when debtors plan to protect financial accounts. Most financial institutions provide that their customers financial accounts are situated at the branch office where the account is maintained or in the state where the customer resides when the account was opened.
For example, if a Georgia resident opened an IRA account at a Georgia branch of a national financial institution, and the debtor then moved to Florida, Florida exemption laws might not apply to the IRA account. The account may instead be anchored at the Georgia branch where it was opened. The new Florida resident is better protected if he moves his existing financial accounts to a Florida branch of the same financial institution or to a new institution with Florida offices.
Can My 401 Be Taken In Bankruptcy
ERISA-qualified plans are for the most part protected from start to finish during bankruptcy, including from creditor claims, bankruptcy proceedings, and court judgments.
This follows a change to the Bankruptcy Code enacted by the federal Congress in 2005, which declares that any ERISA retirement accounts shall be fully-protected and excluded from the bankruptcy estate, including 401 plans, 403 plans, Roth and other IRAs, Keough plans, profit-sharing plans, money-purchase plans, and defined-benefit plans.
Bankruptcy And 401 Withdrawal
The fact that a 401 is protected during bankruptcy means people can file without jeopardizing their retirement. As such, it is important to understand a few things you should not do with your 401 or other tax-exempt retirement accounts when thinking about bankruptcy, for these actions could jeopardize the safe status of your retirement accounts.
It is generally a bad idea to withdraw from a 401 or other retirement account or try to cash-out the account for any purpose since the money becomes income and is no longer exempt in your bankruptcy.
A second common mistake to be avoided is withdrawing from a 401 to pay off one or several debts as you sense yourself going underwater. Though this may seem like a good quick-fix solution, there is actually no need to waste exempt assets to pay debts that are likely to be discharged within just a few months of declaring bankruptcy. The better long-game strategy is to allow the bankruptcy process to run its course and remember that all retirement savings, and IRAs up to the 1.3 million dollar cap, will not be considered as part of your assets.
Also, it is ill-advised to do anything that might look like a preferential transfer, where one creditor gets the benefit of being paid while the other creditors are thrust into the bankruptcy for court relief. In fact, if the bankruptcy trustee gets a sense that a preferential transfer has occurred, they may actually call back the monies from the creditor and place them into the estate.
Can My 401 Be Seized Or Garnished
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If you’re older and struggling with debt, you may worry that the funds in your company 401 account could be tapped by creditors to satisfy your financial obligations.
Fortunately, those assets are generally safe from seizure or garnishment by creditors, such as banks, at least as long as they remain in the 401 account. The same does not generally apply if you owe back taxes or penalties to the federal government. Depending on the state in which you live, your account may also be vulnerable if you’re a small business owner with your own independent 401.
Effect Of Bankruptcy On 401 Loans
A loan from your 401 plan isn’t discharged during bankruptcy because it’s essentially money you owe yourself. When you borrow money, you’re taking a loan from the value of your 401 account and when you repay it, you’re putting it back in. If you fail to repay your 401 loan, it counts as a distribution from your 401 plan, resulting in income taxes and, if you’re under 59 1/2 years old, early withdrawal penalties.
How To Protect All Types Of Retirement Accounts
One of the key items to review is how to protect all types of retirement accounts such as 401 s, IRA accounts, pensions, and any plans that have special protection through the Internal Revenue Code.
You may be tempted to use your 401 or retirement benefits to pay your debts.
While that may be a viable option, you should understand that once you file bankruptcy its often a better option to keep your 401 and other retirement assets so you can get a fresh start when you receive a bankruptcy discharge.
A lot will depend on whether you are seeking to discharge unsecured debts such as medical bills and credit card debts through a Chapter 7 bankruptcy or whether you are looking to pay secured debts and secured arrearages through a Chapter 13 bankruptcy.
Chapter 7 bankruptcy is generally used when you dont have homes or cars you want to keep.
You simply declare bankruptcy and list all the unsecured debts you have.
Property that is excepted or exempted can be saved. Property that cant be protected is sold and used to pay your creditors.
Chapter 13 bankruptcy is used to save secured assets.
A secured asset is an asset that can be sold by the creditor who gave you the loan for the asset.
The most common example is a mortgage for a home or a secured car loan.
Debtors offer to pay off any arrears on the secured assets over a 3-5-year period.
They also agree to pay the continuing secured loan. If they pay off the plan, their assets are saved.
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Do Iras Have Creditor Protections
IRAs are also protected under BAPCPA, but vary by IRA type. BAPCPA excludes traditional contributory IRAs and Roth IRAs from the bankruptcy estate, but only up to a current limit of $1,362,800 which is inflation adjusted every 3 years. On the other hand, IRAs funded from a rollover of a previous employers retirement plan are protected and do not count towards the limit for contributory traditional or Roth IRAs. Under BAPCPA, Rollover IRAs are entirely excluded from bankruptcy. Unfortunately, inherited IRAs are not afforded the same protection as contributory or Rollover IRAs and federal law does not afford the same protections in bankruptcy.
Outside of bankruptcy, traditional contributory IRAs and Roth IRAs and inherited IRAs, have protection only under state law. As such, the possibility of asset seizure by creditors depends on the application of individual state law. ERISA Plans, on the other hand, are fully protected from creditors under federal law , except for Qualified Domestic Relations Orders and IRS levies. Lastly, Rollover IRAs lose their ERISA protection outside of bankruptcy and taxpayers must therefore look to state law for creditor protections.
Participants in qualified retirement plans subject to ERISA should consider the degree of creditor protection when deciding to keep their accounts under an ERISA Plan or rolling over accounts to an IRA.
Speak To Your Bankruptcy Attorney About Protecting 401k And Other Retirement Savings When You File
A lot of the money youve saved for your retirement is exempted from liquidation when you file for bankruptcy. This is one of the reasons its important to avoid using this money to prevent bankruptcy if youre struggling financially. In many cases, bankruptcy is the better option even if someone has significant retirement savings.
For more information or to speak to an attorney who can help you make the most of bankruptcy, contact R. Flay Cabiness, II, P.C. at or to schedule a consultation.
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First How Does A 401 Work
A 401 is an employer-sponsored retirement plan in which a certain amount of your income is deposited. In many cases, the employer contributes a certain amount as well. If you sign up for the automatic deduction, the money is deducted before tax time. Thus, it simultaneously builds your retirement fund and lowers your tax liability.
Is A 401k Loan Exempt Under Chapter 13 Bankruptcy
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