How Does Filing for Bankruptcy in Massachusetts Impact My Retirement Savings?

When you file for bankruptcy in Massachusetts, you may be concerned about how this will affect your retirement savings. The good news is that Massachusetts law provides certain protections for retirement accounts in a bankruptcy proceeding. Under Massachusetts law, most retirement accounts, including 401(k)s, 403(b)s, profit-sharing and money purchase plans, SEP and SIMPLE IRAs, and defined-benefit plans are exempt from the bankruptcy estate. This means that these funds are generally protected from creditors when you file for bankruptcy. However, not all retirement accounts are protected. For example, traditional and Roth IRAs are only protected up to a certain amount.

What If I Have Multiple Retirement Accounts?

If you have multiple retirement accounts, you might be wondering how each of them will be treated in a bankruptcy proceeding. In Massachusetts, the type of retirement account you have determines how much protection it receives. For instance, if you have a 401(k) and a traditional IRA, the 401(k) is fully protected, while the traditional IRA is only protected up to the $1.3 million limit. If you have more than this amount in your IRA, the excess could be used to pay your creditors. Consider this hypothetical scenario: You have $1.5 million in a traditional IRA and $500,000 in a 401(k). In this case, $200,000 from your IRA could be considered part of your bankruptcy estate, while your 401(k) would be fully protected.

What If My Retirement Account Is My Only Asset?

If your retirement account is your only significant asset, you might be particularly concerned about how bankruptcy will affect it. As mentioned earlier, most retirement accounts are protected from creditors in a bankruptcy proceeding. However, if your retirement account is significantly larger than the exemption limit, you might have to use some of it to pay off your debts. For example, if you have $2 million in a traditional IRA, approximately $700,000 could be considered part of your bankruptcy estate. In such cases, consult with a talented attorney who is familiar with Massachusetts bankruptcy law. They can help you understand your options and guide you through the bankruptcy process.

What Happens If I Withdraw My Retirement Savings Before Filing for Bankruptcy?

If you’re considering bankruptcy, you might be tempted to withdraw your retirement savings to pay off your debts. However, this is generally not a good idea. Firstly, withdrawals from retirement accounts before the age of 59.5 are subject to income taxes and a 10% early withdrawal penalty. This could leave you with significantly less money than you expected. Secondly, money withdrawn from a retirement account is no longer protected by bankruptcy exemptions. This means that if you withdraw your retirement savings and then file for bankruptcy, those funds could be used to pay your creditors. For example, let’s say you have $50,000 in a 401(k) account. If you withdraw that money to pay off your debts and then file for bankruptcy, that $50,000 could be considered part of your bankruptcy estate and used to pay your creditors.

Can I Continue Contributing to My Retirement Account While Filing for Bankruptcy?

When you’re dealing with bankruptcy, you might wonder if you can continue contributing to your retirement account. The answer to this question can be complex and can depend on the specifics of your situation. In general, you can continue making contributions to your retirement account during a Chapter 13 bankruptcy. However, these contributions will be considered as part of your disposable income when determining your repayment plan. This means that if you’re making significant contributions to your retirement account, you might end up with a higher monthly payment. In a Chapter 7 bankruptcy, you’re typically not allowed to make contributions to your retirement account while your case is pending. However, once your case is discharged, you can resume making contributions.

What If I Inherited a Retirement Account?

Inherited retirement accounts can be a bit more complicated when it comes to bankruptcy. In Massachusetts, inherited IRAs are not given the same protection as other retirement accounts. This means that if you’ve inherited an IRA, it could be considered part of your bankruptcy estate and used to pay your creditors. Let’s consider a hypothetical situation where you’ve inherited an IRA worth $500,000 from a relative.

If you file for bankruptcy, this entire amount could be considered part of your bankruptcy estate, regardless of the exemption limit for traditional IRAs.

Can I Transfer My Retirement Savings to Avoid Bankruptcy?

You might be thinking about transferring your retirement savings to another account or to a family member to protect it from bankruptcy.

However, this is generally not a good idea. Transferring assets with the intent to hinder, delay, or defraud creditors is considered a fraudulent transfer under Massachusetts law. If a court determines that you’ve made a fraudulent transfer, it can reverse the transfer and use the assets to pay your creditors. For example, if you transfer $100,000 from your IRA to your child’s account before filing for bankruptcy, the court could reverse this transfer and use the $100,000 to pay your debts.

What If I Have a Joint Retirement Account with My Spouse?

In Massachusetts, joint retirement accounts are generally considered marital property and are divided equally in a bankruptcy. However, the portion of the retirement account that belongs to the non-filing spouse is typically protected. This means that if you and your spouse have a joint 401(k) worth $200,000 and you file for bankruptcy, only your $100,000 share could be considered part of your bankruptcy estate.

Remember, bankruptcy is a complex legal process with many potential pitfalls. An experienced attorney can help you navigate this process and protect your rights. If you’re considering bankruptcy, call Benner Law at 774-404-8321 for a free case evaluation!