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Saving for Retirement During Your Chapter 13 Bankruptcy

Gavel On Bankruptcy Law Book
If you're receiving calls from your creditors or struggling to pay your bills each paycheck, filing for Chapter 13 bankruptcy is one solution to achieve relief from your financial obligations. Chapter 13 bankruptcy requires you to repay all — or a portion — of your debts (how much you repay depends on your income, assets, and the type of debt that you have).
In exchange for repaying a portion of your debts, you get to keep your assets. However, when your Chapter 13 plan ends, the bank discharges some of your unsecured, non-priority debt.
You may have concerns that filing for Chapter 13 bankruptcy will make it difficult for you to properly prepare for your retirement, especially if you are an older adult with limited time to save.  Keep reading to learn why Chapter 13 bankruptcy won't derail your retirement savings plan and the steps you can take to fortify your retirement nest egg during your bankruptcy period.

Most Retirement Accounts are Safe from Your Creditors

One great advantage of Chapter 13 bankruptcy is that for the most part, the money in your retirement accounts will not influence the amount of your monthly plan payment. Your creditors cannot seize accounts that meet ERISA (Employee Retirement Income Security Act) criteria and pensions (both Keoghs and defined-benefit plans), nor will they count as qualifying assets in your bankruptcy plan.
Accounts that are usually completely safe, regardless of their balances, include:
  • 401(k) plans
  • Profit-sharing plans
  • Money purchase plans
  • 403(b) plans
One common account that does not satisfy ERISA qualifications is the IRA (individual retirement account). IRAs are only exempt up to $1,283,025 per person. This means that if you are filing bankruptcy as a married couple, you can each exempt the maximum amount.
Note that this exemption is for the total amount in your IRAs, not per plan. The courts may use amounts over this figure to calculate your bankruptcy payment.
Money held within savings accounts, CDs, or taxable investment accounts is not automatically protected, even if you plan to use the money for your future retirement expenses. However, you may have the option to protect a portion of your money using an exemption for bank account balances or a wild card exemption. For example, in Wisconsin, you can exempt up to $5,000 in a bank account. 

Leave Room for Retirement Contributions

In a Chapter 13 bankruptcy, you agree to pay all of your disposable income into your payment plan for the entire duration. However, calculations to determine your disposable income take into account your necessary expenses. Some courts consider retirement contributions necessary expenses, while others do not.
The figures for your necessary expenses are not calculated according to your actual expenses. Instead, the court uses guidelines to determine what figures are reasonable. If your Chapter 13 bankruptcy budget includes money for variable expenses, like gifts, eating out, entertainment, or household expenses, you can work to minimize your expenditures and send the excess to your retirement account. 

Contribute Unexpected Money to Your Retirement Savings

During the duration of your Chapter 13 plan, you'll likely receive money aside from your regular income, like income tax refunds, small cash gifts, work bonuses, rebates, and inheritances. Your bankruptcy lawyer will inform you of the guidelines for reporting the receipt of irregular sums of money to your bankruptcy trustee. 
Fortunately, your bankruptcy trustee does not expect you to report every single unexpected cash gift or windfall. It isn't feasible for the trustee to seize the $100 you got for your birthday to repay your creditors. Use these unexpected sums to beef up your retirement savings. 
Tired of feeling like your debt consumes your life? Contact The Michelson Law Office today to see if Chapter 13 bankruptcy is right for your situation.