Individuals struggling with overwhelming debt can potentially regain control by filing for personal bankruptcy. During a bankruptcy case, people with high levels of personal debt ask the courts for relief. They secure protection from immediate collection efforts through an automatic stay.
They also protect their financial future by eliminating some of their debts or even renegotiating them with their creditors. Some people who might benefit from a personal bankruptcy filing delay bankruptcy or attempt desperately to avoid filing altogether because they assume that their most valuable assets could be at risk.
Those who have a well-funded 401(k) or a pension that they have accrued over many years likely do not want to risk their financial stability during retirement for immediate financial relief while they can still work. Many people do not understand what actually occurs during bankruptcy, which can leave them anxious about unlikely or impossible outcomes.
Do people have to worry about the loss of retirement savings if they file for personal bankruptcy?
In a Chapter 7 bankruptcy
Some people refer to Chapter 7 bankruptcy as liquidation bankruptcy. This name comes from the fact that the courts sometimes require that people sell off or liquidate high-value resources before granting a discharge of their eligible debts. Thankfully, there are exemptions available that allow people to preserve certain resources despite needing bankruptcy relief.
In a Chapter 7 bankruptcy, retirement accounts protected by the Employee Retirement Income Security Act of 1974 (ERISA) are generally exempt from creditor claims. Under both federal bankruptcy laws and Arkansas state rules, retirement savings are often exempt from liquidation.
401(k)s, pensions and even IRAs are all accounts that people do not have to worry about losing simply because they request bankruptcy relief. Just like creditors could not acquire those resources through litigation, the banks cannot force their liquidation as part of a bankruptcy filing.
In a Chapter 13 bankruptcy
The good news for those contemplating Chapter 13 bankruptcy because of their competitive income or above-average assets is that liquidation is generally not a component of Chapter 13 bankruptcy. Instead, the filer works with the courts and their creditors to try to arrange for a reasonable repayment plan.
They allocate their disposable income, not their current assets, toward the repayment of their major debts. Their retirement savings are typically not at risk.
Reviewing the resources an individual has accumulated, the debts that have become unmanageable and other details about personal circumstances with a skilled legal team can help people select the best type of personal bankruptcy. The sooner that people consult about their bankruptcy options, the better their chances of optimizing their protection and financial relief.