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Protecting Your Retirement Savings During Bankruptcy


Bankruptcy is a process that many individuals turn to when they want to ease stress and regain control over their finances. While bankruptcy can provide a start, it raises concerns for those near or already in retirement. One of the worries is how bankruptcy will affect their earned retirement savings. A Los Angeles bankruptcy and retirement lawyer can help you safeguard your retirement savings during bankruptcy with a focus on the laws and exemptions applicable in California.

Understanding the Basics

Filing for bankruptcy doesn’t automatically mean losing everything you own, including your retirement accounts. There are laws in place that protect assets from being liquidated to pay off creditors, including most retirement accounts.

How Retirement Income Factors into Bankruptcy

If you’ve reached the golden years and are enjoying retirement benefits, it’s vital to understand how this income might affect your bankruptcy proceedings. Let’s explore the different ways your retirement income is considered under Chapter 7 and Chapter 13 bankruptcy.

In Chapter 7 bankruptcy, the emphasis is on liquidating non-exempt assets to repay creditors. Your eligibility depends on your income level relative to the median income in California or successfully passing a means test.

  1. Means Test Considerations: The means test is a financial assessment to establish your inability to pay off debts. Your monthly income from pensions or other retirement accounts may be factored into the calculation in this assessment.
  2. Income Above Basic Needs: If your retirement benefits are perceived as exceeding what you require for essential support, those additional funds might be utilized to satisfy your creditors.

Chapter 13 focuses on restructuring your debt while preserving significant assets. Here’s how retirement benefits play a role:

  1. Income Calculation: Retirement benefits can be a part of the income assessment that helps shape your repayment plan under Chapter 13. These benefits could augment the amount of debt you’re required to pay back over three to five years, depending on your overall financial situation.

Retirement Income: A Delicate Balance 

Navigating the nuances of how retirement income is treated in bankruptcy requires careful planning and consideration. These rules are intricate, and missteps could affect your financial future. Collaborating with a knowledgeable bankruptcy attorney who is well-versed in these specific areas of law can provide clarity and confidence as you embark on this complex legal journey.

Generally Exempt Retirement Accounts

Both federal and California law recognize types of retirement accounts as exempt from bankruptcy proceedings. These include ones such as 401(k)s, 403(b)s IRAs (both Traditional and Roth) pension plans, and profit-sharing plans.

The laws governing these protections are based on the principle that one’s retirement savings should not be put at risk due to hardships.

Know Your Limits

While many retirement accounts enjoy protection during bankruptcy proceedings, there are limitations to be aware of. For instance, regarding IRAs, the exemption limit can vary depending on the type of bankruptcy you file and your specific circumstances as a debtor. Awareness of these limits and seeking guidance to protect your retirement savings is essential.

In California, residents in Los Angeles and throughout the state have the option to choose between state and federal exemption systems. The choice you make can significantly impact how much of your assets you’re able to retain. It’s crucial to consult with a bankruptcy attorney who can help you decide based on your situation.

Avoiding Pitfalls

  1. Early Withdrawals; Withdrawing funds from retirement accounts before filing for bankruptcy can result in tax penalties, potentially jeopardizing your exemption protection.
  2. Transferring Funds; Moving money between accounts or transferring funds to family members prior to filing for bankruptcy may be seen as an activity that could lead to legal consequences.
  3. Neglecting Planning; Failing to consult with an experienced attorney may result in the loss of assets, including portions of your retirement savings that are not exempt.

Contact Wadhwani & Shanfeld

Approaching bankruptcy laws and being mindful of any setbacks is crucial. Seeking advice from a Los Angeles bankruptcy attorney familiar with the legal framework in Los Angeles can offer personalized guidance and assurance. They help ensure that your retirement savings are shielded during this period, providing you with peace of mind.

If you’re considering bankruptcy as a pathway, it’s important to understand its complexities regarding how it impacts your retirement savings. Feel free to reach out to Wadhwani & Shanfeld for assistance.




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