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Could Bankruptcy Threaten Your IRA?

Serious mature couple checking domestic financesAs you prepare to file for Chapter 7 or Chapter 13 bankruptcy, it’s understandable to be nervous about your financial future. While you will undoubtedly take a financial hit, many of your assets will be protected, including your retirement accounts and pension plan funds.

Individual retirement accounts, or IRAs, receive certain federal protections through the Bankruptcy Abuse Prevention and Consumer Protection Act, which took effect in 2005. While creditors are prohibited from accessing funds in your IRA when collecting on the debt owed to them, there is a limit to how much money you can protect via a traditional or Roth IRA. This number changes on an annual basis. If you have more than one IRA, that limit applies to all the funds in all your accounts combined — not just to each individual account.

All other retirement accounts are protected by federal exemptions without regard to their worth as long as they are qualified accounts under the Employment Retirement Income Security Act (ERISA).

Be careful about taking IRA withdrawals

If you are thinking about withdrawing funds from your IRA before or during your bankruptcy proceedings, be sure to talk it over with your bankruptcy attorney first. A financial adviser may also provide key guidance. Transferring money from your IRA to a savings or checking account means that money will not be subject to the exemption protection afforded to it while it’s still in the IRA, unless that cash qualifies for a different exemption.

Once that cash is freed up, the bankruptcy court can go after it and you will have a hard time protecting the money. If your bankruptcy is a Chapter 7, it will go to a bankruptcy trustee, who will use it to pay your creditors. If you’re in the middle of a Chapter 13 bankruptcy, that money will become a factor in determining the amount of your plan payments.

Therefore, it is better to avoid making any IRA withdrawals so that you don’t throw a wrench in your bankruptcy proceedings. Keep that money where it is protected until you’ve completed the bankruptcy case.

To learn more about how bankruptcy affects IRAs and other retirement funds, reach out to a trusted bankruptcy attorney at Jeff Field & Associates. Call us at 404-381-1278 or contact us online to schedule a free initial consultation.

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