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Strategies for Preserving Retirement Income in Bankruptcy

 

Strategies for Preserving Retirement Income in Bankruptcy

Filing for bankruptcy can be a difficult decision, especially when retirement is on the horizon. Many people worry about losing their retirement savings and income in bankruptcy. However, there are strategies you can use to protect your retirement funds and income when filing for bankruptcy. This article will discuss those strategies, the applicable laws, and how to navigate the bankruptcy process to preserve your retirement.

Overview of Bankruptcy and Retirement Accounts

When you file for bankruptcy, most of your debts will be discharged – meaning they are eliminated. This includes unsecured debts like credit cards, medical bills, personal loans etc. Your retirement accounts like 401(k)s and IRAs are usually protected in bankruptcy. This allows you to get rid of debt but keep your retirement savings.

There are two main types of consumer bankruptcy:

  • Chapter 7 – This is known as “liquidation” bankruptcy. Your nonexempt assets are sold to pay creditors. Most retirement accounts are exempt and you get to keep the funds.
  • Chapter 13 – This is “reorganization” bankruptcy. You keep your assets but must repay some debts over 3-5 years from disposable income. Retirement account funds are usually protected.

The main laws governing retirement accounts in bankruptcy are:

  • ERISA – Protects employer-sponsored plans like 401(k)s. These have unlimited protection in bankruptcy.
  • Federal and state exemptions – Allow you to exempt and protect IRAs and certain amounts in other retirement accounts.

The strategies discussed below utilize these laws to maximize retirement account protection. Having an experienced bankruptcy attorney assist you is highly recommended.

Strategies to Protect Retirement Funds in Chapter 7

Chapter 7 bankruptcy provides the most protection for retirement accounts. Strategies include:

Christine Twomey
Christine Twomey
2024-03-21
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Alex Zhik contacted me almost immediately when I reached out to Spodek for a consultation and was able to effectively communicate the path forward/consequences of my legal issue. I immediately agreed to hire Alex for his services and did not regret my choice. He was able to cover my case in court (with 1 day notice) and not only was he able to push my case down, he carefully negotiated a dismissal of the charge altogether. I highly recommend Spodek, and more specifically, Alex Zhik for all of your legal issues. Thanks guys!
Guerline Menard
Guerline Menard
2024-03-18
Thanks again Spodek law firm, particularly Esq Claire Banks who stood right there with us up to the finish line. Attached photos taken right outside of the court building and the smile on our faces represented victory, a breath of fresh air and satisfaction. We are very happy that this is over and we can move on with our lives. Thanks Spodek law 🙏🏼🙏🏼🙏🏼🙏🏼🙌🏼❤️
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Keisha Parris
2024-03-15
Believe every single review here about Alex Z!! From our initial consultation, it was evident that Alex possessed a profound understanding of criminal law and a fierce dedication to his clients rights. Throughout the entirety of my case, Alex exhibited unparalleled professionalism and unwavering commitment. What sets Alex apart is not only his legal expertise but also his genuine compassion for his clients. He took the time to thoroughly explain my case, alleviating any concerns I had along the way. His exact words were “I’m not worried about it”. His unwavering support and guidance were invaluable throughout the entire process. I am immensely grateful for Alex's exceptional legal representation and wholeheartedly recommend his services to anyone in need of a skilled criminal defense attorney. Alex Z is not just a lawyer; he is a beacon of hope for those navigating the complexities of the legal system. If you find yourself in need of a dedicated and competent legal advocate, look no further than Alex Z.
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Taïko Beauty
2024-03-15
I don’t know where to start, I can write a novel about this firm, but one thing I will say is that having my best interest was their main priority since the beginning of my case which was back in Winter 2019. Miss Claire Banks, one of the best Attorneys in the firm represented me very well and was very professional, respectful, and truthful. Not once did she leave me in the dark, in fact she presented all options and routes that could possibly be considered for my case and she reinsured me that no matter what I decided to do, her and the team will have my back and that’s exactly what happened. Not only will I be liberated from this case, also, I will enjoy my freedom and continue to be a mother to my first born son and will have no restrictions with accomplishing my goals in life. Now that’s what I call victory!! I thank the Lord, My mother, Claire, and the Spodek team for standing by me and fighting with me. Words can’t describe how grateful I am to have the opportunity to work with this team. I’m very satisfied, very pleased with their performance, their hard work, and their diligence. Thank you team!
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2024-03-12
Hey, how you guys doing? Good afternoon my name is Anthony Williams I just want to give a great shout out to the team of. Spodek law group. It is such a honor to use them and to use their assistance through this whole case from start to finish. They did everything that they said they was gonna do and if it ever comes down to it, if I ever have to use them again, hands-down they will be the first law office at the top of my list, thank you guys so much. It was a pleasure having you guys by my side so if you guys ever need them, do not hesitate to pick up the phone and give them a call.
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2024-03-12
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Bee L
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Amazing experience with Spodek! Very professional lawyers who take your case seriously. They treated me with respect, were always available, and answered any and all questions. They were able to help me very successfully and removed a huge stress. Highly recommend.
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divesh patel
2024-02-24
I can't recommend Alex Zhik and Spodek Law Firm highly enough for their exceptional legal representation and personal mentorship. From the moment I engaged their services in October 2022, Alex took the time to understand my case thoroughly and provided guidance every step of the way. Alex's dedication to my case went above and beyond my expectations. His expertise, attention to detail, and commitment to achieving the best possible outcome were evident throughout the entire process. He took the time to mentor me, ensuring I understood the legal complexities involved to make informed decisions. Alex is the kind of guy you would want to have a beer with and has made a meaningful impact on me. I also want to acknowledge Todd Spodek, the leader of the firm, who played a crucial role in my case. His leadership and support bolstered the efforts of Alex, and his involvement highlighted the firm's commitment to excellence. Thanks to Alex Zhik and Todd Spodek, I achieved the outcome I desired, and I am incredibly grateful for their professionalism, expertise, and genuine care. If you're in need of legal representation, look no further than this outstanding team.

Fully Exempt Retirement Accounts

  • 401(k), 403(b), pension, TSP – These qualify for unlimited exemption under ERISA. The full account balance is protected.
  • Traditional and Roth IRAs – Up to $1 million is exempt for each spouse under federal bankruptcy law. State exemptions may protect more.
  • 457(b) plans – These are exempt under federal law if set up by a governmental employer.

The best strategy is to fully fund these accounts prior to bankruptcy to maximize exemption amounts. Be aware that recent large contributions could be challenged as fraudulent transfers[1].

Roll Over Lump Sums to Protected Accounts

If you have a lump sum pension/401(k) distribution or non-exempt retirement account, consider rolling it over to a protected account like an IRA before filing. This shields the funds from creditors[2].

Avoid Cashing Out Accounts

Liquidating retirement accounts to pay debts prior to bankruptcy will backfire. Those funds will become nonexempt assets the trustee can seize. Leave the money in the protected accounts.

List Accounts Properly on Your Bankruptcy Schedules

Be sure to list all retirement accounts on your exemption schedule and cite the exact laws that protect them. This prevents the trustee from wrongfully taking possession.

Strategies for Protecting Retirement Income in Chapter 13

In Chapter 13 bankruptcy, you must repay some debts from disposable income. Strategies to protect retirement income include:

Exclude Social Security, Pensions and Disability Income

These sources are excluded from the income calculation used to determine your repayment plan. This helps lower your payment amount[3].

Object to Improper Inclusion of Retirement Income

If the trustee tries to pull IRA/401(k) withdrawals or pension payments into the income calculation, your attorney can object and get it removed. This further minimizes the payment.

Make Voluntary Repayments from Exempt Income

You have the option to make additional voluntary payments using Social Security or other exempt retirement income. This helps you repay debt faster without raising the base plan payment.

Seek Permission Before Making Retirement Account Withdrawals

Notify the bankruptcy trustee if you need to take retirement account withdrawals for living expenses. Get approval first to avoid issues.

Delay Retirement Account Withdrawals If Possible

Try to leave accounts intact during your repayment plan. Taking withdrawals means losing creditor protection and exposes the funds to repayment claims.

Contribute to Exempt Retirement Accounts

Continue contributing to 401(k)s and IRAs during the plan – this shelters part of your income from creditors. Just disclose the contributions properly.

Other Strategies to Preserve Retirement in Bankruptcy

Some additional tips for protecting retirement through bankruptcy:

  • Hire an experienced bankruptcy attorney, their expertise is invaluable.
  • Consider alternatives like debt consolidation or settlement if you want to avoid bankruptcy altogether[4].
  • If married, make sure accounts are evenly split and all are fully exempted. File individually if needed.
  • Keep good records of all retirement accounts and be thorough in listing them.
  • Research all applicable federal and state retirement exemptions that apply to you.
  • Avoid moving assets around before filing, as it can trigger fraudulent transfer claims.
  • Disclose all material information properly on your bankruptcy petitions and schedules.
  • Realize Chapter 7 provides the most retirement account protection, but Chapter 13 may allow you to keep nonexempt assets like a house.
  • Understand how retirement income impacts your repayment plan in Chapter 13, and take steps to minimize it.
  • Consider continuing retirement contributions during and after bankruptcy to rebuild savings faster.
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