Will My Retirement Funds be Lost if I File for Bankruptcy?

A very common and legitimate question clients frequently ask is, "Will I lose my retirement money if I file for bankruptcy?"

Oftentimes, clients who could greatly benefit from filing for bankruptcy and starting over with a Tabula Rasa, end up dragging their heels about filing due to their fear of losing their 401(k) or Social Security benefits.

As we all know, planning for retirement can be nerve-racking even without the potential of entering into a bankruptcy agreement. Many of us wonder if we will be able to sustain our standard of living in our older years.

Those people with financial difficulties, however, have an even greater pressure to plan for the future because their unfortunate missteps in the past have bumped them off the path of financial security.

So, if you file for bankruptcy, will your retirement money be endangered? The answer to that is: usually not. However, this is not to say that none of your allocated retirement funds will be used to pay off your debts.

As a general rule, the majority of retirement accounts aren't typically lumped under the broad category of your "bankruptcy estate." The good news for our clients is that this means that most of your retirement money is not available to creditors.

Examples of retirement monies that are safe include: traditional 401(k)s, IRAs, government retirement accounts, and pensions*.

Your Social Security benefits are also safe from creditors.

A quick and easy way to determine whether or not your retirement funds would be accessible to creditors is to ask yourself one simple question*. Do you have access to your retirement funds without incurring a financial penalty? If you are able to withdraw funds from a retirement account without paying a tax penalty, these funds will usually be considered as part of your general assets when you file for bankruptcy. This means that they would be available to creditors.

If you are not able to withdraw money from a particular retirement account without facing a tax penalty, then you probably have a more traditional retirement account which would not be within creditors' reach.

Another question frequently asked is whether or not you will be able to continue making contributions to your retirement account if you file for bankruptcy. The answer to that is yes, And, even better news is that continuing to make contributions to a retirement fund may mean that you will be required to pay less money to your creditors. Don't stop contributing even if you think a bankruptcy case is in your near future!!

Those who are self-employed entrepreneurs have the trickiest decisions to make when it comes to filing for bankruptcy and setting up official retirement funds. Many self-employed people assume that their retirement account is legitimate and inaccessible by creditors. The problem with this line of thinking is that many small business owners do not fully understand all of the requirements that must be met for an account to be officially considered as a retirement fund account.

The bottom line is: if you're considering bankruptcy, don't assume that your retirement money would be taken to pay off your debts. Avoid draining those accounts, and don't make any decisions before consulting a qualified bankruptcy attorney. They know the specific requirements for any and all of your funds when it comes to repaying creditors. Make an informed decision by talking to your attorney before doing something that may negatively affect your standard of living in your golden years.