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Will I Lose My Retirement or Social Security If I File for Bankruptcy?

bankruptcy law in Montgomery AL

If you fall behind on your bills or are hit with an unexpected event such as an illness or unemployment, you might worry that filing for bankruptcy could jeopardize certain assets and benefits. This is a common concern, but the good news is that these benefits are generally safe when you file for bankruptcy protection.

Perhaps you are still raising a family and don’t want to lose the retirement savings that you’ve built up so far. Or maybe you’re already retired and need a fresh financial start. Currently, more seniors are filing for bankruptcy than at any time in the past. A 2010 University of Michigan study found that seniors are the fastest growing group of bankruptcy filers in the U.S.

Needing to break free from crushing debt is understandable, but you want to make sure that you won’t lose precious savings and benefits at the same time. What happens to your retirement savings or pension in a bankruptcy? How are social security benefits impacted and what if you are already collecting? Here are the answers to those questions about retirement and bankruptcy.

Will Filing Bankruptcy Affect My Retirement Funds?

In short, no. Filing for bankruptcy will not have any impact on your retirement funds. Whether you have a 401(k), 403(b), Keogh, IRA, Roth IRA, or any other ERISA-qualified pension plan the money in those retirement accounts is exempt in both a Chapter 7 bankruptcy and Chapter 13 bankruptcy.

The federal government places an exemption limit of $1,283,025 per person on traditional and Roth IRAs. The good news is that the state of Alabama has opted out of federal bankruptcy exemptions, so there are no limits for Alabama filers. In other words, your entire IRA balance is protected.

Cashing out retirement accounts prior to filing for bankruptcy could be a big mistake. Not only will early withdrawal subject you to severe penalties and taxes, but there is another consequence as well. Doing this will eliminate the protections that you have under bankruptcy laws for these assets and make the money available to your creditors to pay off debts.

Even if you don’t cash out your retirement funds before filing for bankruptcy, there are a few exceptions to their full protection in a bankruptcy filing. The IRS may be able to access your retirement assets if they have a valid tax lien against you. Divorcing spouses may also have access to those assets. A qualified bankruptcy attorney can advise you of your rights in either of these instances.

Are Social Security Benefits Safe in Bankruptcy?

According to Federal law, Social Security benefits cannot be garnished by creditors to pay debts. There are a few exceptions such as government debts for student loans, taxes, defaulted federal home loans, judgments, and child support. However, once you are collecting benefits and those checks are in your bank account,  they could be vulnerable to garnishment by creditors.

There is a 2011 rule that banks are supposed to protect two months worth of Social Security or similar government benefits within a bank account. For this reason, many recipients have their benefits deposited into a separate account, so there is no mistaking that the funds are “protected.”

If you are already collecting Social Security benefits and wish to file for bankruptcy, the amount of those benefits may or may not impact your eligibility. While you won’t have to include those benefits in a Chapter 7 bankruptcy means test, they are included on a Schedule I budget. If you file for Chapter 13 bankruptcy, the current rules in Alabama require that you list Social Security benefits as part of your current monthly income.

Speak With a Qualified Alabama Bankruptcy Attorney

Filing for bankruptcy at any age can be a stressful and confusing process. You don’t want to give up assets that you are entitled to keep, yet you want to make sure that your debts are cleared, and the harassing collection attempts stop. In some cases, a simple debt settlement could help you avoid bankruptcy altogether.

At The Dansby Law Firm, our experienced and compassionate debt relief attorneys will review your situation, and advise you of your options, including whether or not bankruptcy is the best solution for you and your family. Contact our Montgomery office now at 334-539-8787 or online to schedule a free initial consultation.

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