Sunday, September 5, 2010

Bankruptcy and Retirement Plans

Many of Tom McAvity's clients have a special concern when it comes to their 401(k)s, IRAs, and other retirement funds. So how will bankruptcy take its toll on these financial accounts?

Thankfully with the change in bankruptcy law made by congress in 2005, most retirement funds are safe from creditors, but there are some caveats. While defined benefit plans, Keoghs, and 401(k)s (among others) have unlimited protection from creditors, other retirement funds such as ROTH and traditional IRAs do have limits. Specifically, there is only guaranteed protection on these types of IRAs up to $1,095,000 for each individual. Important note: This means that the combined value of these retirement funds will be added up, and of all of them, you will be protected up to $1,095,000. So to be clear, you're not exempt per account, it's a cumulative exemption on all accounts added up.

Many people considering bankruptcy want to know what will happen with loans they have taken from their retirement funds. To answer this question, you and your bankruptcy attorney will first have to determine which type of bankruptcy you will file. In chapter 7 bankruptcy, you will have to pay back the loans because chapter 7 bankruptcy protection does not cover what you owe to yourself, only what you owe to others. Conversely, when you file for chapter 13 bankruptcy, loans made from retirement funds can be discharged. In addition, you will make payments on what you owe to your creditors over five years (in most cases, sometimes three years depending on the bankruptcy.)

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