This Article was contributed to Leisure Freak by writer and legal assistant Veronica Davis.
If you’ve found yourself burdened with debts you’re unable to repay and creditors are knocking at your door, you may consider filing for Chapter 13 bankruptcy. Also called the wage earner’s plan, Chapter 13 bankruptcy protection allows those with a steady income to develop a repayment plan while retaining assets like their car and home.
Under Chapter 13, you must dedicate all your disposable income to repaying your debt over three to five years. The courts will calculate how much of your income you need to live comfortably and garnish the rest to pay off creditors.
However, there are certain assets that the courts must leave intact, including your retirement fund. Assets like your pension, social security, and 401k are exempt under bankruptcy protection, meaning the court can’t seize them as part of your repayment plan. This means bankruptcy may be the best alternative when considering how to ensure a stable financial future.
Protection Under Employee Retirement Income Security Act (ERISA)
In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA) to protect the interests of employees participating in benefit plans. In 2005, Congress updated the law to protect ERISA-qualified pension plans from seizure during bankruptcy. This means when you file for bankruptcy, you’re entitled to keep the funds in certain savings and investment accounts.
These accounts include:
- 401(k)s
- 403(b)s
- Keoghs
- Profit-sharing plans
- Money purchase plans
- Defined-benefit plans
- IRAs and Roth IRAs*
*You may only keep up to $1,362,800 in your combined IRA accounts. However, it’s very rare for individuals to reach this amount, so these funds will likely be protected.
Non-Exempt Funds and Accounts
Though you may have personal savings accounts meant for retirement, these are not protected under ERISA and may be rolled into your repayment plan. Non-exempt accounts include:
- Savings accounts
- Investment accounts
- Stock options
However, your Social Security benefits are always protected from bankruptcy cases, even if you’re actively receiving Social Security benefits.
Retirement Contributions, Payments, and Withdrawals
If you regularly make voluntary contributions to protected accounts, you may have to pause them under Chapter 13 bankruptcy. Depending on your state’s laws and the court’s ruling, these contributions may or may not be necessary to sustain your lifestyle. However, if your employer requires contributions to these funds, you will be allowed to continue making them.
Though pension plans, 410k’s, and other retirement plans are usually exempt, this exemption may be lifted if you receive regular payments from these funds as part or all of your income. Additionally, if you’ve made withdrawals from any of these funds to make debt payments, that money may be rescinded and redistributed evenly among creditors to avoid penalties for preferential transfer.
Being Judgment-Proof
Though retirement accounts being paid out may be subject to garnishment under Chapter 13 bankruptcy, none of these statutes apply if you’re judgment-proof. This occurs mainly when a person has so little non-exempt income or assets that they can’t repay the debt in full.
For instance, you may be judgment-proof if you don’t own any property and most of your income is comprised of Social Security, unemployment benefits, public assistance, veteran’s benefits, or federal retirement. This means that, unless or until you begin earning a non-exempt income or obtain non-exempt assets, creditors cannot attempt to collect debt payments.
If you’re currently judgment-proof, note that this may not always be the case. When planning for the future, consider your debt, so you know whether you’ll need Chapter 13 bankruptcy protection.
Thank you Veronica Davis for contributing this informative article to Leisure Freak.
Author Bio
Veronica Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She writes for Philadelphia bankruptcy attorney David Offen.