What happens to your retirement funds if you file bankruptcy before you retire? How about during retirement? Is your Social Security income at risk? Does bankruptcy even make sense for seniors? Here are the answers to five common questions about retirement in bankruptcy.
How Will Filing Bankruptcy Affect My Retirement Funds?
Retirement accounts will probably will not be affected. Regardless of how much you have saved in your 401(k), 403(b), 457(b), Keogh or other profit-sharing or defined benefit plan, the money in these retirement accounts cannot be touched by creditors if you file Chapter 7 bankruptcy. They also don’t affect the amount you pay back when filing Chapter 13 bankruptcy. If you have funds saved in an IRA, Roth IRA, SEP IRA or SIMPLE IRA, the funds are also generally exempt from creditors, to an extent. As of 2016, this limit was $1.2 million ($1,283,025, to be exact). It increases each year to adjust for the cost of living.
Should I use my retirement to pay off bills instead of filing bankruptcy?
- There are two ways people usually use retirement to pay off debt: 1) take a distribution from your 401(k) or your IRA to pay off debt; or 2) take a loan out against your retirement. Both of these are almost never a good idea because you’re using protected money to pay debts that could be eliminated just by filing a bankruptcy case. I’ll let you in on a little secret. This almost never fixes the fundamental problem. You may pay off the debt, but what happens in a few years when you’ve charged up those accounts again? You’ll find yourself deep in debt again with no retirement. And, if you withdraw those funds from your 401(k) or your IRA before you turn 59 and a half, you’ll owe a big fat tax bill the following year.
What If I Am Already in Retirement and Taking Distributions?
If you are taking income from your retirement accounts, that money is more accessible to creditors. But it depends on how much income you need to meet your living expenses. For individuals who file Chapter 7 bankruptcy, anything above what you need to support yourself could be fair game to creditors. For those who file Chapter 13 bankruptcy, the income from your retirement plan or plans will likely be included in determining how much you can afford to repay your debt. That being said, you cannot be forced to take out more income than you need.
Can Creditors Get to My Social Security Income?
Social Security and disability income are protected under federal law from being garnished by creditors. Once the money hits your bank account, however, the money is susceptible to potential garnishment. The good news is that under a rule established in 2011, banks must know whether federal benefits are included in an account before garnishing the assets. If Social Security or similar government benefits are in a bank account with other funds, two months’ worth of benefits are protected from garnishment. Some individuals play it safe by holding Social Security income in a separate account so it is clear that the assets are separate from others.
Can I get rid of Medical Debts Through Bankruptcy?
Yes, if you qualify for Chapter 7 bankruptcy, your medical bills or healthcare related debt is counted among the types of debt that can be discharged (in other words: completely wiped away). Credit card debt, personal loans, utility bills, attorney fees, and some court judgments can also be discharged. Mortgage, car payments, tax liens and other tax bills, child support, and most student loan debt are bills that are generally non-dischargeable in a Chapter 7 bankruptcy. If you do not qualify for Chapter 7 because you have the income to meet these obligations, you could consider Chapter 13. Under this type of bankruptcy, you pay back creditors, including medical providers, over time. However, if your income is not high enough, none of your unsecured creditors get paid (this includes medical bills and credit cards.)
Is Bankruptcy a Good Idea for Seniors?
That depends on your situation. If you are drowning in unpaid medical bills or credit card interest and late fees, bankruptcy could offer some relief. However, some seniors may be considered “judgment proof,” which means that you simply do not have anything for creditors to collect if they sue you and win. If this is your case, a bankruptcy may be unnecessary.
Find out more about bankruptcy and whether it makes sense for you by calling, 501.891.6000, or set up a free consultation by clicking here.