Will I lose my retirement savings in bankruptcy? - Christie D. Arkovich, P.A.
Generally, retirement savings are exempt in bankruptcy. In Florida, we have some very good exemptions for ERISA plans, IRAs, SEP-IRAs, 401(k)s, 403(b)s, anything that's pretty much an ERISA tax-qualified plan is exempt. There is a cap, but it's a million dollars, so hardly any of our clients meet that cap.
Without a doubt, thinking about bankruptcy as an option can be a scary thought. Much of that fear comes from not knowing how filing bankruptcy will affect you. There are many moving parts in a bankruptcy and your fear can be decreased when you understand how all the parts will affect you.
Regarding retirement savings, there is good news. Generally, retirement savings are exempt in bankruptcy. A private plan that falls under the Employee Retirement Income Security Act of 1974 (ERISA), an individual retirement account (IRA), a Simplified Employee Pension Individual Retirement Arrangement (SEP-IRA), a 401(k) and 403(b) all qualify for bankruptcy exemption in Florida. The cap for these retirement savings is about a million dollars.
One piece of advice you may have heard about funding your retirement is that you have to “pay yourself first.” This is sound budgeting advice. But when times are hard and the creditors are calling, it might be tempting to dip into your retirement savings to stop the stress now. For nearly every situation where bankruptcy is an option, taking your future money to pay a present bill is a bad idea.
First off, your retirement savings are exempt in bankruptcy, which means no one can take that money from you to pay your creditors. That money is yours. It is both in your and in the nation’s interest for you to keep your retirement funds intact. Second, the debt which is causing you stress right now might be discharged in bankruptcy. If this happens, you never have to pay that debt. Or it might be partially discharged. Or it might be negotiated to a lower amount.
For example, one debtor partially paid many of her late credit cards with her retirement savings before seeking advice from a lawyer. The credit collectors convinced her that she had to pay those debts or she would lose everything (not true). Without knowing her rights, she made a decision based on her emotions. It is a heartbreaking moment to tell a client that she could have kept all the money she gave to the creditors since the debts were discharged in her bankruptcy.
You might have some qualms about not paying an obligation you promised to pay. It is natural to have conflicted feelings during bankruptcy or debt relief proceedings. It is important to understand why we have the bankruptcy laws we have. Did you know that the right to file bankruptcy is part of the United States Constitution? Article 1, Section 8 gives Congress the authority to create the bankruptcy laws. Those laws are designed so people can have a second chance. Protecting retirement savings is just one way the government does that.
Even before it might be time for bankruptcy, having a frank discussion with a bankruptcy lawyer can help you see the path ahead and not make financial decisions based on emotions. An attorney can advise you based on your personal situation and save you from irreversible errors that can have devastating effects well after the bankruptcy is completed.