Effect of Bankruptcy on Retirement Accounts

For many Americans, retirement accounts are the only substantial assets that they own.  As a result, one common concern about bankruptcy for debtors, and especially senior citizens, is its effects on retirement accounts. Fortunately, most retirement accounts are exempt assets for bankruptcy purposes; therefore, debtors can discharge their debts in bankruptcy while still safeguarding their retirement accounts.

Retirement Accounts Are Exempt

Whether assets are classified as exempt or non-exempt for bankruptcy purposes is an important issue when entering into Chapter 7 bankruptcy proceedings.  Since the ultimate aim of Chapter 7 is to discharge all eligible debts, a debtor must also forfeit assets to pay down those debts.  Some assets, however, are exempt from bankruptcy, which means that the debtors can retain these assets, no matter the amount of debt owed.  Retirement accounts are exempt assets, in that debtors can keep them, despite filing bankruptcy.

Types of Retirement Accounts

Federal bankruptcy laws generally protect all types of retirement accounts that are tax-exempt under the Internal Revenue Code.  For instance, a debtor’s 401(k) is protected by bankruptcy.   Exempt assets also include pensions, profit-sharing, 403(b) accounts, and 457(b) deferred compensation plans.  Likewise, an IRA is an exempt asset.  As a result, when debtors with retirement accounts, such as senior citizens, file bankruptcy, many retirement accounts are exempt from liquidation.

Senior Citizens

Protecting retirement accounts may be of particular concern when senior citizens file bankruptcy, often due to large medical bills or other types of debts.  For many senior citizens, retirement accounts are the only assets that they have been able to build over a long period of time.  Federal bankruptcy laws, however, classify most retirement accounts as exempt assets, which helps to secure the future of all debtors.

Contact an Attorney for Legal Assistance with Bankruptcy

If you have concerns about the effects of Chapter 7 bankruptcy proceedings on your retirement accounts, you should consult an experienced bankruptcy attorney for advice.  A bankruptcy attorney can best advise you as to which of your assets, including retirement accounts, are exempt from the bankruptcy process.