Protecting Your Retirement Plan in Bankruptcy

If you are considering filing a Chapter 7 or Chapter 13 bankruptcy, you may wonder how such a decision will impact your retirement plan.  A person’s retirement plan may constitute one’s most valuable asset and be critical to a family’s long-term financial health or a couple’s plans for their golden years.

The impact of a bankruptcy filing on your retirement plan depends on whether your deferred compensation plan is a “qualified retirement plan.”  Typically, a qualified plan is one that is established by your employer that meets certain guidelines set up by the IRS and are tax exempt.  There are two types of qualified retirement plans including defined benefit plans and defined contribution plans.  A defined contribution plan may include a profit sharing plan, purchased retirement plan or 401K account.  Typically, most retirement plans, including 401Ks, profit sharing, Keogh, defined-benefit and IRAs meet these requirements.  However, the law varies and every state’s bankruptcy law is slightly different so it is important to discuss this issue with an experienced Kansas bankruptcy attorney if you are considering filing bankruptcy in Kansas.

Debtors in most states receive some protection of their retirement plan if a person files for either Chapter 7 or Chapter 13 bankruptcy relief.  For example, a 401K is protected under law from being taken by creditors to pay your debts in bankruptcy.  In addition, traditional and Roth IRAs are usually protected up to one million dollars, and certain annuities are safeguarded under state law.  Retirement plans of many public employee retirement plans also are expressly protected under Kansas state law.  However, state laws may differ so you should seek legal advice regarding this issue.

It is important to know that if you owe money for back taxes; the IRS can seize your retirement to satisfy your unpaid tax bill.  This is important because IRS liabilities are not generally dischargeable in bankruptcy.  If you owe unpaid federal income taxes and have any type of deferred compensation or retirement plan, you should obtain legal advice from an experienced Kansas bankruptcy attorney to avoid inadvertently exposing your retirement savings to IRS enforcement for past tax obligations.

An experienced Kansas bankruptcy law firm can help you protect amounts above the protected one million dollar threshold though a variety of bankruptcy planning practices.  It is a bad idea to withdraw funds from a retirement account like a 401K to avoid bankruptcy.  This approach will result in depleting available protected assets by paying obligations that may ultimately be discharged in bankruptcy.  A person who withdraws funds from a 401K to pay down unsecured debts may also be exposed to tax penalties.  If you have taken out a retirement plan loan, repayment of that loan depends on if you file 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 over a three to five year period) as part of your repayment plan, anything owed after that period of time typically is discharged.

Another important point to consider is the voluntary payments you make to your retirement plan.  During bankruptcy, you are authorized to use funds for certain authorized necessary expenses.  Hence, you will have to stop making voluntary contributions during the bankruptcy process.  An exception may apply if you are nearing retirement and establish that you need that money because you do not have savings.

The other side of this issue involves what happens to your retirement plan if your company files for bankruptcy. Because retirement plans are protected under ERISA, by and large, your retirement account should be fine. Companies are required by law to keep retirement funds separated from their business funds in a trust or insurance account.  Federal law prohibits the abuse and mismanagement of retirement plan funds by corporations.

If you are considering filing for bankruptcy in Kansas, your first step should be to consult a qualified Kansas bankruptcy attorney.  Our experienced Kansas City bankruptcy attorney, Weston Moore can advise you on how to protect your retirement plan and other assets.  We offer a free initial no obligation case evaluation so contact us today at 913-782-7075.  The law office of Weston R. Moore handles bankruptcy matters in Olathe, Johnson County and throughout Kansas.

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