Retirement Assets in Bankruptcy
There is a widespread misconception about the availability of retirement assets to creditors in bankruptcy. Many people put off filing bankruptcy, because they fear the loss of retirement accounts to creditors. Based on this misinformation, they often attempt to pay their creditors by withdrawing funds from 401(k) Accounts, Individual Retirement Accounts (IRA)s or other employment related retirement planning accounts.
Retirement Assets are Protected
Generally speaking, retirement assets are held in a trust and are therefore not available to bankruptcy creditors. Moreover, in reviewing the exemptions available to bankruptcy debtors, retirement assets are excluded from the bankruptcy debtor’s estate. This means that these assets are not counted against available exemptions.
For this reason, it is important to consult an attorney whenever you find yourself in a situation where you cannot pay credit card bills. Zealous bill collectors will often encourage unsuspecting debtors to withdraw money from their retirement accounts to pay credit cards and other unsecured obligations.
This is problematic in two ways:
- The debtor’s retirement account funds are depleted, and the debtor will have very limited retirement benefits at the time that the debtor leaves his or her employment.
- Additionally, the debtor may not know that the withdrawal of these retirement assets will create income tax liabilities. Since the retirement funds were placed in the retirement account on a tax deferred basis, withdrawal of these funds will result in increased income taxes on the withdrawn assets.
The debtor has therefore solved one problem, only to create another. Obviously, this can create an extreme hardship on debtors with a large amount of unsecured debt.
Understand Your Rights
Given the risks, if you are contemplating paying off credit card debt or other obligations with retirement funds, please consult an attorney first. My firm, Daley Zucker Meilton & Miner, LLC, is available to discuss these matters on an individual basis at (717) 724-9821. Please contact us today for help protecting your retirement assets during a bankruptcy.