From the time we are young, we are encouraged to save for retirement. To make the process a bit easier, many employers even offer sponsored savings plan such as 401(k)s or Roth IRAs. Due to the struggling economy of the past few years, many Americans have used up their savings and have just their retirement savings left. If you find yourself in this situation and are facing massive debt, you are likely worried about what will happen to your retirement account should you file for bankruptcy.
If you are in a dire financial crisis, you might be considering cashing out your retirement account to pay off your debts. This is usually not a good idea. For one thing, you will incur excessive taxes and fees for cashing out the account before it matures. You should also consider whether you have enough in your retirement account to pay off all of you debts. Will you be able to get back on your feet and pay off the full amount of your debt or will you be left with large bills and have to pursue bankruptcy anyway? In the later case, you may be making a mistake by using these funds to pay debts that you may not have been fully responsible for, had you filed for bankruptcy. You also may have been able to pay off your debts for a fraction of their worth and been able to keep your retirement account.
In 2005, the Federal bankruptcy law was revised and the treatment of retirement accounts in personal bankruptcy was changed. Now, most retirement accounts and pension plans are exempt under the bankruptcy code. Their eligibility for exemption depends upon whether or not they are ERISA qualified. ERISA, which stands for the Employee Retirement Income Security Act, is a Federal law that protects the interests of employee benefit plan participants. If the asset is exempt, it is not considered part of the bankruptcy estate at all. This means that it will not be liquidated in Chapter 7 bankruptcy and will not affect the amount you pay to unsecured creditors in Chapter 13.
Many people are unclear about the impact that bankruptcy will have on their future, particularly retirement. If you are considering bankruptcy and are concerned about your retirement accounts, you should talk to an experienced bankruptcy attorney who can help you to better understand changes in the law and explore the different options available to get you out of debt while protecting your future interests.