Before we address the way that bankruptcy may or may not impact your retirement funds, we should explain the basic differences between a Chapter 7 and a Chapter 13. These are the two types of bankruptcies that are most commonly utilized by individuals. A Chapter 7 is a liquidation bankruptcy. Unsecured debts like credit card debts and medical bills are discharged under this form of bankruptcy. If you are current on your mortgage payments and your equity falls within a certain limit, you can retain ownership of your home if you were to file for a Chapter 7 bankruptcy.
You have to pass a means test to be able to qualify for a Chapter 7 filing. If your income is less than the median in the state of your residence, you would automatically pass this test. Getting back to the retirement question, if you are receiving Social Security benefits, they would not be counted when you are calculating your eligibility for Chapter 7 under the means test.
A Chapter 13 bankruptcy would be an option if you cannot pass this means test. It may also be a better choice for you even if you could qualify for Chapter 7, particularly if you are behind on your mortgage. This is a reorganization bankruptcy. Your disposable income is utilized to pay back some of your debts over a three-year or a five-year period. Mortgage arrearage could be corrected over the course of this repayment arrangement. When it comes to Social Security when you are in Chapter 13, the laws vary with regard to whether your benefits must be claimed as income, so your attorney will discuss this with you.
Under federal laws, virtually all retirement accounts are looked upon as exempt property when a bankruptcy is filed. The types of accounts that are exempt include 401(k)s, individual retirement accounts, 403(b)s, Keoughs, and profit-sharing plans. Most pension plans are also safe when you file for bankruptcy.
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