If I file bankruptcy, will they take away my life savings? In other words, do I get to keep my retirement money?

Retirement plans such as your 401k and IRA’s are protected in bankruptcy no matter what chapter of bankruptcy you file, pensions are too. Your pension plan is excluded from the bankruptcy estate. The Supreme Court held in 1992 in Patterson vs. Schumate that all retirement plans that qualify under ERISA cannot be touched or seized by bankruptcy trustees or your creditors. The Bankruptcy Reform Act of 2005 also added an additional exemption in place that protects your IRA up to $1,362,800.00. The exemption is part of the numerous bankruptcy protections that allow you to keep most, if not all of your assets.

For practitioners, we find it interesting that some retirement plans are considered property of the estate and have to be exempted while others are not and do not have to be exempted, but it really does not matter. Congress has determined that your retirement funds should be protected, and they did the right thing by making sure you could file bankruptcy and protect your life’s savings. Yes, at times Congress does get it right!

Keep in mind, however, you cannot simply call a bank account or investment account your “retirement” savings and keep it in a bankruptcy. In order for the asset to be protected, the account needs to be part of a legally recognized, tax-deferred retirement vehicle according to the IRS. Examples of these retirement vehicles include IRA’s, Pensions, 401k, 403b and 457 plans.

Avoid mistakes with your money

Over the years, we have helped many people who came to see us over debt issues in their later years. The common thread is that they continued to pay credit card debt after they retired – causing them to use up their savings while they are retired. The problem is they put the credit card companies ahead of themselves – risking that they will still be living but have no money to pay their bills.

We also see many people who, while working, find themselves in the credit card trap and mindlessly keep paying — for years and years – with the result that they save nothing for retirement. The mistake they made was thinking that if they can afford to make the minimum payments (or even a bit more) that they are okay. They are okay for the Credit Card Companies – but this is not okay for their retirement and future.

If you are young and not too deep in debt, it may be possible to delay saving for retirement until the debt is gone, but you have work at changing your spending habits and create a plan to get out of debt. At Thav Gross, we have “Budget Management” programs to address this task to allow you to live within your means and get out of debt.

The bottom line – if you are older and carrying significant debt, you are creating a problem for yourself at retirement by continuing to make the banks richer. We have repeatedly talked about this issue on Law and Reality, but I assure you of this… if you retire with debt, you risk the following problems.

  • Running out of money before you die.
  • Becoming a dependent of your family or friends
  • Not having enough to enjoy your retirement years.

A bankruptcy discharge can do different things for different people but the main result in that is that if you are young, you can eliminate your debt and free up cash flow to make regular contributions to retirement savings. If you are retired, a bankruptcy discharge can save your retirement fund for your use and let you live without debt, allowing you to let your money last as long as you do. I urge you to call me today for a free consultation on how to get out of debt. I can be reached at 248.645.1700.

Have a great week.