Lefkovitz & Lefkovitz

Nashville Office 615-256-8300       Cookeville Office 931-400-2218

Nashville Office 615-256-8300
Cookeville Office 931-400-2218

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How retirement plans are treated in personal bankruptcy cases

On Behalf of | Jul 25, 2017 | Chapter 13 |

Tennessee residents who are struggling with overwhelming bills may pursue debt relief by filing Chapter 7 or Chapter 13 bankruptcy petitions. While these individuals may be most concerned with their immediate financial situations and making ends meet, they should also be aware of how personal bankruptcies can impact long-term investments like 401(k) and IRA retirement plans.

Money saved in 401(k) retirement accounts are protected during times of financial hardship by the Employee Retirement Income Security Act of 1974. While these funds are generally off-limits to creditors during a personal bankruptcy, the Internal Revenue Service may levy future disbursals to cover unpaid taxes. While IRA and Roth IRA accounts are both protected in bankruptcy, lawmakers have established firm limits. The IRA exemption is capped at $1.3 million, but even these funds may not be safe under the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act if withdrawals are being used as income.

Self-employed retirement plans are not subject to the $1.3 million exemption, which means that they are protected in a bankruptcy no matter how much they contain. However, profit sharing schemes and employee stock plans are unprotected unless they qualify under ERISA.

Bankruptcy differs from alternative approaches like debt consolidation because it does not require the consent of creditors and offers the possibility of a fresh start. Attorneys with debt relief experience will likely be familiar with federal laws like ERISA and BAPCPA, and they may be able to explain how filing a bankruptcy could impact an individual’s investments and retirement savings. Attorneys could also point out that pursuing a Chapter 7 or Chapter 13 bankruptcy prevents creditors from initiating litigation or garnishing wages and puts an immediate stop to harassment from bill collectors.

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