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Will I lose my retirement savings if I file for bankruptcy?

On Behalf of | Jul 10, 2020 | Bankruptcy

One of the biggest concerns of people who are contemplating bankruptcy is whether they will lose their retirement savings. The good news is most 401(k)s, IRAs, and other retirement plans are exempt from creditors. This means your retirement accounts are likely protected while you get the debt relief help you need. However, if you touch your retirement investments at any point, their exemption status may change. You should take steps to ensure you don’t jeopardize your savings.

Don’t even think about it

An “out of sight, out of mind” approach is best when it comes to your retirement savings and bankruptcy proceedings. You should never:

  • Withdraw from your 401(k): As soon as you cash out your 401(k), it loses its exemption status. You don’t even have to drain the account entirely. Merely moving a portion of your savings to another account will leave your retirement assets vulnerable to creditors.
  • Use your retirement accounts to pay off your debts: When you’re feeling overwhelmed by debt, you can feel desperate. The temptation to use your retirement accounts to pay off your debts is real. It’s best to avoid this temptation. A bankruptcy filing is almost always a better choice for debt relief. If you withdraw from your retirement accounts early, you will not only face a stiff financial penalty, you’ll also have nothing left for your retirement.
  • Shift your assets before filing for bankruptcy: It seems like a smart play to shift some non-exempt assets into a retirement account before filing for bankruptcy. It’s also an obvious play and is one that the law frowns upon. Shifting assets will result in your retirement accounts losing their exemption status at best and could lead to criminal fraud charges against you at worst.

Don’t allow your concerns about your retirement savings to keep you from getting the debt relief help you need. A bankruptcy filing is there to assist you through a difficult time, not make things worse. You should discuss your options with a professional who understands the bankruptcy system.