How Does Filing for Bankruptcy Affect My Long-Term Savings Plans?
One of many considerations individuals have when filing for personal bankruptcy is how it might affect retirement and other long-term savings plans. No one wants to risk losing his or her pension, 401K or other resource intended to provide support throughout old age. Fortunately, the federal bankruptcy exemption protects these assets — and Pennsylvania law allows you to take full advantage of this.
Retirement assets protected under federal law
Along with other important exemptions for homes and property, retirement funds cannot be dissolved to repay creditors as part of bankruptcy proceedings, thanks to a Congressional overhaul of federal bankruptcy laws back in 2005. This exemption covers the following funds:
- Profit sharing
- Stock bonus plans
- Individual Retirement Accounts (IRAs)
- Deferred compensation plans (401K)
What does this mean for Chapter 7 filings? You don’t have to liquidate your retirement accounts. And when it comes to Chapter 13, these accounts cannot be considered among your assets when assessing how much you must repay unsecured creditors. Other tax-exempt funds may be included under the federal exemption, which your bankruptcy lawyer can explain during your consultation.
It should be noted that there is a cap when it comes to IRAs. If your fund contains more than approximately $1,245,000 (amount adjusted regularly, so consult your attorney) then the surplus may not be exempt. Again, should this apply to you, your lawyer can explain how this will affect your bankruptcy plan.
Pennsylvania bankruptcy exemption vs. federal exemptions
Pennsylvania is one of the states that give you the choice of using federal exemption statutes instead of state exemptions. PA state law looks at your job when evaluating your pension’s exemption status, such as whether you are a city or state employee, police officer or have private retirement benefits. The limit on the exempt amount and the timing of when you file for bankruptcy versus any amounts deposited into your retirement account within a year of that filing also differ from the federal statute.
While you should discuss whether state or federal exemptions would provide better protection with one of our Pennsylvania bankruptcy lawyers once he or she evaluates your specific financial situation, it is likely that the federal exemptions will provide the most protection of your retirement funds.