Considering Filing for Bankruptcy in Retirement? Read This First

Bankruptcy can take a lot out of a person. Finances on the fritz and all the noise about how “bad” bankruptcy is does nothing to help. The panic can be a lot for anyone to handle, but this is especially true for anyone in retirement trying to make sure they have enough to get by in retired life.

Nobody forms a retirement plan with bankruptcy in mind. The hope is to have enough saved to cover everything, but this isn’t always a reality. So, what do you need to know before filing?

How retirement benefits impact qualification

As we’ve noted previously, Chapter 7 bankruptcy filings require a means test while Chapter 13 filings do not. This test looks at your debt, expenses, and income in order to determine eligibility.

In retirement, Social Security will represent a large portion of your income (or, in some cases, maybe your only source of income). Thankfully, the Chapter 7 bankruptcy means test does not consider Social Security in calculating your income. You paid into it and are reaping the benefits of what you paid.

This means you are far more likely to qualify for Chapter 7 bankruptcy in retirement, but if you have income from other sources you may still be eligible for Chapter 13 bankruptcy.

Protecting retirement funds from bankruptcy

Other sources of income such as pensions or retirement funds from your career as well as balances from IRAs or IRA trusts may be at risk in filing for bankruptcy. Thankfully, most of these funds are automatically protected by law as these funds are what allow you to live on a daily basis.

Bankruptcy cannot strip you so thin that you cannot afford to pay for bills or necessities like food, clothing, or housing. Almost all ERISA-qualified retirement accounts will automatically be exempt from the bankruptcy process prior to withdrawal. This includes plans like 401ks, Roth IRAs, and profit-sharing accounts.

When you take money out of these accounts, however, it is viewed as money you possess and can be targeted by bankruptcy if it’s considered in excess of what you need for daily living.

Do I need to unretire?

Thankfully, this is a firm no as long as you have the means to cover your expenses. Bankruptcy should not entirely disrupt your retirement plans, but it could limit your ability to live as you planned.

Bankruptcy is not the enemy many deem it to be. Ultimately, it is a financial planning tool for when things go wrong and you become overwhelmed with debt. At Hedtke Legal Group, we help clients understand their financial situation clearly and can walk you through the California bankruptcy process when needed. Contact our team and make sure you are prepared for bankruptcy and the changes it will bring to your life.