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Retirement savings and bankruptcy

It is important to consult with an attorney when retirement savings are at issue in a bankruptcy.
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    January 10, 2014 /24-7PressRelease/ -- Retirement savings and bankruptcy

Article provided by Cunningham & Chernicoff, P.C.
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In a recent "Ask a Lawyer" segment hosted by a news program, a question was posed as to retirement savings. A couple,
who had been terminated from long-time employment, took their lump-sum distributions from their employer-sponsored pension plans and deposited the money in two IRAs--one in each of their names. They are now overwhelmed by debts and are considering filing for bankruptcy. Is there a way to shield their IRAs from their creditors in a bankruptcy proceeding. Bankruptcy and financial problems can be scary. However, many people fear bankruptcy for one simple reason--they do not understand or know the facts. According to a study by the Center for Retirement Research at Boston College which reviewed statistics at the end of 2008, the median amount in 401k retirement accounts was $56,000. The thought of losing those retirement savings is unsettling.

Under a Chapter 7 bankruptcy, a debtor's property is classified as exempt or non-exempt. Exempt property are assets that are protected and can be kept by the debtor. Non-exempt property, however, are assets that may be lost to the creditors. Anyone nearing retirement age and considering bankruptcy should know that, under federal law, funds in a 401k are considered exempt assets in a Chapter 7 bankruptcy. Traditional IRA and Roth IRA accounts are treated differently and are generally protected, but only up to $1,171,650.

For some unfortunate individuals, the reverse question comes up--what happens if you are a long-time of employee of a company with a healthy 401k and the company goes bankrupt? Can the money that you put into a 401k plan be taken by the company's creditors to recover the company's debts?

Generally, your 401k assets should not be at risk when an employer declares bankruptcy. Those retirement plan assets are protected under federal law--the Employee Retirement Income Security Act of 1974. The law covers all "qualified retirement plans," which includes defined contribution plans such as a 401k. Under ERISA, all employee's retirement funds must be kept separate and in a trust account, or within an insurance contract. Therefore, if an employer should undergo bankruptcy, the employees' retirement investments are, unless there are some unforeseen facts, safe from the company's creditors.

The Bankruptcy Code is not easy to navigate and anyone who has concerns about what assets may be exempt in a bankruptcy proceeding should seek the immediate council of an experienced Pennsylvania bankruptcy attorney.

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