How does bankruptcy impact retirement savings?

For older Atlanta residents who are struggling to pay all of their bills and stay current on debt, one of the main concerns they have when considering bankruptcy is their retirement savings. Particularly for those who are already retired and living on a fixed income, filing for bankruptcy to restructure debt can be a scary proposition if it means risking the loss of those important savings that you need to stay afloat.

An important aspect of evaluating the impact of bankruptcy on retirement is timing, since retirement accounts are protected from creditors while that money remains segregated from funds used for daily expenses.

This means that if someone is filing for bankruptcy and takes money out of their retirement account to use for rent, groceries, or other every day needs, then the money is no longer afforded protection as retirement funds. Now it is simply considered cash on hand and will be a factor in determining how much debt someone can pay off.

However, when the money is in the retirement account it remains inaccessible, so distressed borrowers can discharge debt while still saving for retirement. This rule may seem confusing to some, but bankruptcy laws are designed to help people start over and move forward to financial solvency, rather than to set them back and undo a lifetime of work and honest savings.

So, when considering whether or not filing for bankruptcy will negatively impact retirement, consider the timing of the filing and retirement plans and discuss these issues with a qualified and experienced professional. Each bankruptcy case is different and has unique aspects, so while general rules can apply and be used as guidance, there may be exceptions to the rule.

Source: Fox Business, “Will my 401(k) be Safe if I File for Bankruptcy?” Justin Harelik, June 19, 2013.