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Retirement Funds Are Protected in Bankruptcy

Most people do everything in their power to pay their debts. Second jobs, side hustles, and cutting expenses may work for some. For others, such tactics provide a temporary reprieve.

Overwhelming debt isn’t usually caused by outrageous and frivolous spending. Extravagant trips and designer clothes are not to blame. More often, financial hardship from student loans, medical bills, divorce, or job loss is the culprit.

To stop some of the creditor calls, you might think you should pay off debts using money in your retirement accounts. Doing so not only puts your future self in financial dire straits, but you'll pay steep penalties for early withdrawal.

Bankruptcy allows you to discharge or restructure your debt while protecting your precious retirement funds.

Not All Assets Are Liquidated in Chapter 7 Bankruptcy

A common myth with bankruptcy is that you must liquidate all your assets to pay off as much of the debt as possible. Depending on your financial situation, you might lose some assets, but many are protected. Your home is exempt, a vehicle up to a value of $7,000, and some personal property. Also exempted are retirement accounts. Bankruptcy law protects these accounts to minimize the likelihood that you’ll need public assistance in your later years.

The types of funds protected include the following:

  • 401(k)
  • IRA
  • 403(b)
  • Profit-Sharing Plans
  • Defined-Benefit Plans

More than $1.3 million in traditional and Roth IRAs is protected from creditors. The amount changes every three years with adjustments for inflation. The next adjustment is April 2022.

Chapter 13 bankruptcy works differently than Chapter 7. Instead of discharging (erasing) debt, the debt is restructured into a three or five-year payment plan. If you make all your payments on time, you will keep all your assets. Once you successfully complete the plan, any remaining unsecured debt is erased.

Chapter 13 is appropriate for those who have too much income to qualify for Chapter 7, or who have substantial assets they want to protect.

Find a Fresh Start in Bankruptcy

In 2021, almost 3,000 Iowans filed for personal bankruptcy. Almost 90% of those were filed under Chapter 7. Nationally, there were just over 400,000 consumer bankruptcy filings with almost three-fourths also filed under Chapter 7.

There have been about 400,000 bankruptcies nationwide.

Our attorneys at the Hope Law Firm can help you or your business file for bankruptcy:

  • Chapter 7 Bankruptcy: Nonexempt property is surrendered to pay for secured debts. All remaining debt is then discharged. You must meet the income requirements established through the “means test.”
  • Chapter 13 Bankruptcy: This option is for those who don’t meet the income requirement for Chapter 7. You restructure your payments to make them more manageable and discharge part of your debt.
  • Chapter 11 Bankruptcy: This type of bankruptcy is reserved for businesses – generally corporations, partnerships, and LLCs. Debts are restructured. The bankruptcy court has control over major decisions in Chapter 11 bankruptcy.

All bankruptcy proceedings will halt creditor calls, bills, and lawsuits.

Understand Your Options to Deal with Debt

The weight of excessive debt can take a physical, psychological, and emotional toll. The first step in coming out from under that burden is to understand your options. Our compassionate and resourceful attorneys can explain the advantages and disadvantages of each possible choice.

With just $100 down, we can make all the creditor calls stop.

Discuss your financial situation in a confidential consultation. Call (515) 298-5056 or reach out through our online form.