Chapel Hill Bankruptcy Lawyer Q&A: Are Your Retirement Accounts Safe from Your Trustee in a Chapter 7? - Orcutt Bankruptcy Blog - North Carolina Skip to main content

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Question for Your Chapel Hill Bankruptcy Lawyer: How Safe Are Your Retirement Accounts?


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We often get questions from clients (and potential clients) about what will happen to their retirement accounts if they file bankruptcy. I know this is a huge concern for you if you’ve got significant assets in these all-important accounts so today we’re going to explain how these are treated in a chapter 7 or chapter 13 bankruptcy. The two main factors in whether they are exempted are the amount of money you have in the account and the type of account (or accounts) your money is stashed in. Here’s what you need to know:

Defined Benefit Plans Are Protected in Bankruptcy!

If your company offers a defined benefit plan – also known as traditional pension – you’ll be happy to know they are protected and won’t be seized by your Trustee in a bankruptcy. These are called “defined” plans because the amount you will receive once you retire is pre-defined. These are usually based on years of service and the amount of salary you’ve earned. These are common with union jobs such as railroad jobs, certain skilled trades, teachers and government workers.

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Contributory Benefits Plans Are Protected in Bankruptcy!

Contributory retirement plans are plans that you pay into with a portion of your wages and may (or may not) include matching funds from your employer. Common types of contributory plans include 401(k), SIMPLE (savings incentive match plans for employees of small employers) plans, IRA (individual retirement account) and SEP (simplified employee pension) plans. As long as your plan is protected by ERISA (Employee Retirement Security Act), it can’t be touched by creditors or the Trustee during a bankruptcy. An exception to this is if you have more than $1 million in a 401(k). Ask your North Carolina bankruptcy attorney what will happen if this is your circumstance.

Annuities Are Usually NOT Protected in Bankruptcy!

An annuity is an insurance product that requires you to make an initial investment (usually a significant one) and then you’ll later get recurring payments of a set or variable amount (depending on the specifics of the arrangement) at defined intervals. It can be monthly, quarterly or yearly. An annuity can be tapped by your Trustee to help pay your debts unless it was purchased by funds from an IRA and is still part of your IRA account. If it is not part of an IRA or if it exceeds $1 million dollars in value your Trustee will want it.

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Life Insurance Policies with Cash Value Are NOT Protected in Bankruptcy!

Whole life insurance policies are policies that accumulate cash value and can be either cashed in for the accumulated value at any point (subject to any limitations in the terms of the policy) or allowed to run the length of your life and will pay out upon your death. They are called “whole” life because they last your entire life. Depending on the amount of cash value the policy has accrued (it will be greater the longer you have held the policy) your Trustee may force you to cash it in and use the money to pay off some of your debt.

If you have an annuity you depend on or a life insurance policy you don’t want to surrender but are still interested in filing bankruptcy or are looking for other solutions to deal with your debts, contact a reputable North Carolina bankruptcy attorney like John T Orcutt for advice and assistance. Call us now! We offer FREE consultations to new clients at any of our convenient locations

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