Both Chapter 7 and Chapter 13 bankruptcy are excellent tools to shed unsecured debts and get caught up with creditors. Yet some individuals with relatively little short term cash to pay back debts, also have long-term investments that they are concerned about losing in a bankruptcy. When moving forward with bankruptcy it is important to understand which of your investment accounts are protected by bankruptcy law and which ones can be tapped into by the bankruptcy trustee to satisfy your creditors.
With regards to 401(k) plans, these investments are generally protected from creditors during a bankruptcy. It’s important to note that while the bankruptcy trustee can’t levy funds from your 401(k), the IRS can do so in order to satisfy back taxes. Other common investments are traditional and Roth IRAs. These investment are generally protected from bankruptcy assuming that you have less than $1.3 million across all your accounts. Any funds over this mark can be used to pay back debts you owe.
Another bankruptcy protected investment is the SEP or self-employed plans or SIMPLE IRAs. If you are a small business owner or self-employed, these types of investments are exempt from your payment calculations, unless you withdraw money from the account. Anything you cash out will be included in non-exempt income and placed into your bankruptcy estate. As long as they comply with U.S. tax code, pension plans are usually protected from bankruptcy as well, but you will want to consult a bankruptcy lawyer in Dayton OH to ensure your pension is fully exempt in your state.
529 college savings plans are very popular these days and as long as the beneficiary of the fund is a child, step-child, or grandchild, then these are generally protected from bankruptcy. They aren’t if you or your spouse are the recipients of the saving plan funds.
Your home is often your biggest and most important investment, and what happens to it in bankruptcy depends on if you file for Chapter 7 or Chapter 13 bankruptcy. Generally, you will have home exemptions in both, but the amount differs between the bankruptcies, between which state you live in, and if you choose to utilize state or federal exemptions. It is possible to protect your home when filing bankruptcy and you should consult your local bankruptcy attorney if you wish to save your home from being sold to satisfy your debts.