Whether you received a 401(k) at your first job or made the decision to open an Individual Retirement Account (IRA), your retirement savings are incredibly important. After all, these funds reflect the hard work you’ve put in as an adult to enjoy your golden years after leaving the workforce. Unfortunately, when situations arise and you find yourself deep in debt, you may consider bankruptcy. However, you may worry about what will happen to your retirement accounts upon filing. If this reflects your concerns, you’ll want to keep reading to learn more about bankruptcy and your 401(k). In addition, you’ll learn why the most important thing you can do during this process is connect with Montgomery County bankruptcy attorneys to discuss your unique circumstances.
Will My Retirement Accounts Be Seized During Bankruptcy?
First and foremost, it is critical to understand that in Pennsylvania and across the country, the large majority of retirement accounts are protected when filing for bankruptcy. This is because Most retirement accounts are protected under the Employee Retirement Income Security Act (ERISA) or the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
Some accounts, like traditional or Roth IRAs, have limited protections under the BAPCPA. For example, you’ll find that this only protects up to $1,512,350 across all IRAs. As such, if you have multiple accounts that exceed this limit, the excess funds can be seized and used to pay creditors during bankruptcy.
Can I Use Funds From a 401(k) or IRA to Pay Creditors?
If you have not yet filed for bankruptcy, you may wonder if it’s possible to use funds held in your retirement accounts to repay credits to avoid this process. Though this can seem tempting, it’s imperative to understand that is not always a good idea.
When you withdraw funds from a retirement account early, you will incur a 10% tax penalty on the amount withdrawn. In addition, you will lose interest and protections on the account should you use the funds held to repay creditors and avoid bankruptcy.
However, if you wish, you may be able to utilize funds in a retirement account to pay a single creditor during a Chapter 7 filing. It is imperative to understand, however, that you should not do this without first discussing your options with an experienced attorney. This can be viewed as a preferential payment, and the funds you’ve paid to the creditor can be taken back by your bankruptcy trustee. As such, you should discuss this option with an attorney before withdrawing and paying a creditor to keep your secured property.
Filing for bankruptcy is an often overwhelming legal process that requires careful consideration and planning. As such, working with an experienced attorney with Mudrick & Zucker, P.C. is in your best interest. Our team understands how difficult these matters can be, which is why we are here to assist you during this process. When you need help, do not hesitate to contact our experienced team today.
