Personal bankruptcy can help people facing extreme financial hardship. People who have lost their jobs, experienced medical emergencies or accrued insurmountable levels of personal debt can eliminate their financial obligations with a bankruptcy discharge. In some cases, they may have to liquidate assets as part of that process. Other times, they must commit to a structured payment plan for their eligible debts.
Particularly in scenarios where people may be eligible for a Chapter 7 bankruptcy that could require asset liquidation, they may worry about the impact that a bankruptcy filing might have on their most valuable resources. Are retirement savings at risk in a personal bankruptcy case?
Filers are eligible for exemptions
The law must balance the need of people to rebuild their lives with fairness for creditors. As such, liquidation rules in Chapter 7 bankruptcy only apply to assets that filers cannot exempt. There are both federal and state exemptions available, although people in Mississippi can only use state exemptions.
People can protect most, if not all, of their retirement savings. 401(k)s and pensions that are subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA) usually have absolute protection from liquidation in a bankruptcy case. Regardless of how much they have accrued in protected retirement savings, those funds are not at risk in the bankruptcy case.
Many different types of retirement accounts have protection under the law. If creditors could not lay claim to the assets in a debt-related lawsuit, then they likely cannot force their liquidation in a bankruptcy case either.
Even retirement savings accounts typically associated with higher income levels, including IRAs, have at least partial protection from liquidation during bankruptcy proceedings. Currently, those with IRA accounts may be able to exempt up to $1,512,350 held in an IRA account in a Chapter 7 bankruptcy filing.
It is worth noting that assets set aside for retirement that are not in specialized accounts may not be eligible for the same exemptions. Those with more savings than they can protect may have to make a careful decision when they choose between Chapter 7 and Chapter 13 bankruptcy proceedings.
Learning more about asset liquidation and exemption rules can help people make use of bankruptcy protections and prepare for rapid financial recovery after the discharge of their eligible debts.