When I am meeting with clients, I get a lot of questions about retirement plans. Often, I see clients who have very little equity in property, and even less cash, but they may have $25,000 or $30,000 in an IRA or a 401(k). How does having several thousand dollars in a retirement plan impact your options regarding a bankruptcy filing?
To answer this question, I am going to point you to a very helpful series of articles written by my colleague Damon Duncan, a bankruptcy lawyer in Charlotte. Although Damon is writing for the benefit of North Carolina bankruptcy filers, the principles he discusses are applicable to Georgia filings as well:
- If I file bankruptcy will I lose my retirement?
- What is an ERISA qualified retirement plan?
- How do I know if my 401(k) plan is ERISA qualified?
- Can I take out a 401(k) loan after filing Chapter 13?
Generally, funds in an ERISA qualified retirement plan are considered “exempt” assets. This means that your retirement plan is protected from the claims of creditors and these funds are protected from the reach of the trustee. To put this another way, in most cases you could file a Chapter 7 and wipe out $100,000 of credit card debt, but you would exit bankruptcy with your $30,000 IRA intact.
This unique protected status of an ERISA protected retirement plan means that in an attempt to avoid bankruptcy you should never cash out or borrow against a retirement plan to pay dischargeable debt. Many times over the years I have met with clients who raided their 401(k), IRA or company pension only to delay the inevitable (their bankruptcy filing) by a year or two.
Imagine the sinking feeling of learning that the $50,000 IRA that you cashed out over the past year would have been protected in full had you filed last year at this time. Now you have no retirement money and you have tax debt arising from the early cash out.
I can’t emphasize this enough – do not cash out or borrow against a retirement plan to pay debts without first talking to a bankruptcy lawyer. A five minute conversation may save you from a multi-thousand dollar mistake.
As Damon notes in his articles, not every “retirement plan” is exempt and it is always a good idea to get documentation about the plan’s ERISA status prior to filing. Again, these are questions about which you should not guess and an experienced lawyer will give you the guidance that is appropriate for your filing jurisdiction.