If you make the choice to file Chapter 7 or Chapter 13 bankruptcy, you might wonder what will happen to your retirement plan. It is important to know what affects bankruptcy will have on your retirement money and more importantly, if you will be able to keep it or lose it.
Keeping your retirement money if you file bankruptcy depends on if it is a qualified plan. A qualified plan is one that is established by your employer than meets the guidelines set up by the IRS. Typically, most retirement plans, including 401Ks, profit-sharing, Keogh, defined-benefit, money marketing, and IRAs, meeting those requirements.
Most states offer some protection to your retirement plan if you file for either Chapter 7 or Chapter 13 bankruptcy. For instance, a 401K is protected under law from being taken by creditors to pay your debts in bankruptcy. In addition, IRAs are usually protected for up to $1 million dollars and annuities are safeguarded under state law. However, laws differ from state to state.
It is important to know that if you owe money for back taxes, the IRS can seize your retirement plan money to satisfy the bill. Also, if you have a traditional and Roth IRA accounts, you are typically allowed to keep only $1,095.00 per person. What this means is if you have more than that in your account, the balance can be taken in bankruptcy court to pay back your creditors.
If you have taken out a retirement plan loan, repayment of that loan depends on if you filed a Chapter 7 or Chapter 13. If you file a Chapter 7, you have to pay back the loan. For a Chapter 13, since you pay back your debts (usually three to five years) as part of your repayment plan, anything owed after that period of time is typically discharged, including retirement plan loans.
If you are considering filing for bankruptcy, your first step should be to consult a qualified bankruptcy attorney in your area. They can advise as which bankruptcy you should file and give you their expert and knowledgeable opinion as to how to handle your retirement plan during this time.