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).

These protections are applicable for both Chapter 7 and Chapter 13 bankruptcy cases, meaning your retirement accounts are generally protected regardless of which chapter you choose to file. It’s important to understand that these rules are established by federal law, meaning they apply to all bankruptcy cases filed in Pennsylvania, including Montgomery County.

As such, most bankruptcy filers in Pennsylvania will not lose their retirement savings.

Key Protections for Retirement Accounts

  • 401(k), 403(b), and other employer-sponsored plans are generally fully protected in accordance with the ERISA
  • Both traditional and Roth IRAs are protected up to $1,512,350 (number adjusted periodically to account for inflation)
  • Protections apply for both Chapter 7 and 13 filings
  • Funds must remain in the retirement account to retain protections
  • Inherited IRAs typically do not receive the same level of protection

Are There Limits to Retirement Account Protection?

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.

When Retirement Funds May Be at Risk

  • IRA balances that exceed the federal cap may be partially exposed
  • Funds withdrawn prior to filing for bankruptcy do not have protections
  • Improper transfers and account liquidation can trigger scrutiny
  • Certain non-qualifying accounts will not receive protections

Does the Type of Bankruptcy Matter in Pennsylvania?

Many people worry that the type of bankruptcy they choose to file, which for most consumers will either be Chapter 7 or Chapter 13, will impact whether or not they receive protections for their retirement accounts. However, this is generally irrelevant because retirement account protections will apply regardless of the chapter filed. This means your retirement accounts are treated as protected assets regardless of the bankruptcy process you file under

Filers in Montgomery County and the surrounding Pennsylvania communities will generally proceed through the United States Bankruptcy Court for the Eastern District of Pennsylvania, which is located in Philadelphia.

Chapter 7 vs. Chapter 13

  • Chapter 7
    • Involves the liquidation of non-exempt assets to repay creditos
    • Retirement accounts are generally fully exempt
  • Chapter 13
    • Involves a three-to-five-year monthly repayment plan
    • Retirement funds will still be protected from creditors
  • In both cases, courts generally treat retirement accounts as protected assets

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 creditors 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. Using retirement funds prior to filing can reduce or eliminate the protections afforded to these funds.

You should understand that withdrawals will be taxed as income, which can significantly reduce the amount you receive from the transaction. These financial consequences apply to bankruptcy filers across Pennsylvania, including those in Montgomery County.

Risks of Using Retirement Funds to Pay Debts in PA

  • 10% early withdrawal penalty is imposed on those under retirement age
  • Income taxes are applied to the withdrawn funds
  • Loss of long-term compounded growth
  • Loss of bankruptcy protections after funds are withdrawn
  • Early withdrawals can cause financial instability around retirement age

Can Paying a Creditor Prior to Bankruptcy Cause Issues in Pennsylvania?

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.

What Is a Preferential Payment?

  • Payments made to one creditor shortly before filing
  • May be reversed by the bankruptcy trustee assigned to your case
  • May result in delays or additional legal complications
  • Applies generally to payments made within 90 days of filing for bankruptcy

Contact Our Montgomery County Bankruptcy Attorneys

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.