Saving for retirement takes decades of careful planning. Professionals need to set aside income regularly to supplement pension funds or Social Security retirement benefits. After all, they could live for 20 years or more without any employment income after retiring.
Typically, those who are not yet at retirement age cannot access their tax-deferred retirement savings. However, they may worry about losing those funds if they need to file for personal bankruptcy. In a Chapter 7 bankruptcy, in particular, people have to liquidate resources to repay creditors before the courts grant the discharge of their eligible debts.
Are retirement savings at risk of liquidation during a Chapter 7 bankruptcy filing?
Most retirement resources have protection
The type of savings people have accumulated determines whether those resources are vulnerable during bankruptcy. Generally speaking, any retirement savings accounts or pensions subject to the rules of the Employee Retirement Income Security Act of 1974 (ERISA) are exempt from liquidation during bankruptcy proceedings.
Even a well-funded 401(k) is effectively untouchable in a Chapter 7 personal bankruptcy case. Certain types of accounts, such as IRA accounts, are protected up to a specific limit that changes every few years. Unfortunately, if people set funds aside for retirement using a general savings account rather than a 401(k) or another type of specialized account, the funds they have set aside could be at risk of liquidation during the bankruptcy process.
Evaluating exemptions and personal holdings can help people determine what type of bankruptcy they should file. People with retirement resources may need help determining the best path forward when facing overwhelming debt or aggressive collection efforts, and that’s okay.