Common Bankruptcy Options
It may be more common than you think to file for bankruptcy. Laws change regularly, governing what is allowed, what can be protected, and what options are available.
The most common options for bankruptcy for individuals are Chapter 7 and Chapter 13.
Chapter 7 is sometimes referred to as liquidation bankruptcy as it typically requires liquidation of applicable assets to suffice debts owed. For example, barring exemptions, you can liquidate assets to pay off debts owed and possibly discharge some of your debt as well, forgiving you from having to pay off that debt.
The advantages of Chapter 7 are that the process is relatively quick for those that qualify and that a significant amount of your debt can be discharged, allowing you to start fresh with a clean slate. An exception to the debts that can be discharged would be school loans, past due taxes, past due child support or spousal support, and restitution or fines associated with criminal charges.
Chapter 13 bankruptcy is sometimes referred to as restructuring bankruptcy. Chapter 13 allows those qualified to pay back their debts over a period, typically between three to five years. Some creditors will be paid back in total, and others will only receive a percentage of the debt owed.
Depending on your situation, your options may provide a necessary sense of relief and the ability to start over for you and your family.
What is ERISA?
ERISA, or the Employee Retirement Income Security Act of 1974, protects most retirement plans from creditors on a federal level. Examples include 401Ks, pension plans, profit-sharing plans, and group health and life plans. Other plans that can also be protected are HRAs, HSAs, and accidental death or disability plans.
An exception to this protection may be if a creditor needs to access funds for child support or owed alimony or an IRS garnishment.
Further Protection in New York
New York law further protects retirement accounts such as IRAs, ROTH IRAs, SIMPLE IRAs, 403(B) plans for employees of a public school or university, and more. Other plans, such as ESP, Keogh, and church or government plans, are also typically protected.
This protection means that barring any exemptions, bankruptcy may not affect these plans.
What if I’m Already Retired?
Suppose you are filing for Chapter 7 bankruptcy and are already retired and obtaining income from your retirement accounts. In this case, you would need to ensure that your income doesn’t disqualify you from the means test. A means test is what all individuals filing for Chapter 7 must pass to qualify. The means test aims to have a regulated formula that all must abide by that can alleviate the abuse of the bankruptcy system. The test includes income, assets, and unsecured debt, so income received from retirement may disqualify you from filing for Chapter 7.
When filing for Chapter 13, your debts are restructured throughout years of payments. If you are receiving retirement income, you may be expected to pay off debt quicker due to having the ability to do so.
Should I Utilize My Retirement Accounts To Avoid Bankruptcy?
The answer to this question will be different for everyone, but a general rule of thumb is not to use your retirement funds to pay creditors. Before making a decision, consult an experienced bankruptcy attorney to determine the best path for your specific circumstances.
If you are under the age of 59.5, you may be subject to early withdrawal penalties in addition to the income being taxable. Withdrawals may also mean that you no longer pass the means test, or your eligibility or expectations of payments for Chapter 13 will be higher.
Discuss your specific scenario with a trust bankruptcy attorney before you make any moves to ensure that you prepare yourself in the best way possible and protect your retirement funds.
Do New York Laws Protect Individual Retirement Accounts?
As of recently, New York’s laws surrounding Individual Retirement Accounts, or IRAs, have changed. IRAs are now no longer protected from creditors when the IRA, if a non-spouse is the beneficiary of said IRA. What this means is that the state views the IRA similarly to an inherited asset, and therefore it is typically not protected from creditors.
There may be options that you can put in place to safeguard your IRA in this situation as well. Speak with your trusted bankruptcy attorney to discover what options are available.
How Else May I Protect My Nest Egg?
Bankruptcy attorneys speak the language of protection and federal and state laws fluently. They are well-versed in all things bankruptcy and can help you plan for your future and protect the hard work you have accumulated as retirement.
Whether discussing your bankruptcy options, creating a plan to avoid bankruptcy, or ensuring that you have explored all options for your investments so they remain protected, a bankruptcy attorney is an invaluable asset for you and your future.
You may be able to move funds to a trust, add further protection of your assets in other ways, capitalize on the many exemptions that may be available to you, and more. These options may better align you with Chapter 7 or Chapter 13, which you can discuss with your attorney to determine which route provides the best outcome.
Contact our office at (917) 920-6437 to discuss the next steps and learn how we can best assist you in protecting your future and legacy.