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Can I protect investments from Chapter 13?

When a person begins to consider a bankruptcy, often he or she has many concerns about which pieces of his or her property can be exempted from the process. Persons with various investments have a good deal of homework to do if they want to fully understand which of their investments may withstand the process and which face the greatest threat. 401k plans and Roth individual retirement accounts (IRSs) both enjoy some protections against collections during bankruptcy, but they both also feature exceptions to those protections.

401k plans usually are not available to creditors who seek repayment under a Chapter 13 bankruptcy, with one giant exception. If a person owes the Internal Revenue Services (IRS) money, then the agency can place restrictions on your disbursals, even if you're years away from touching the funds. For instance, if a person files for bankruptcy at 50 and cannot access his or her 401k for almost 10 more years, the IRS can place penalties on that person's future disbursals, and those penalties may mean interest against the disbursal that compounds until the person can access the funds.

Similarly, Roth IRA's do enjoy some bankruptcy protection, but only to certain point. Currently, that threshold is about 1.3 million dollars. Once your Roth IRA's exceed that value (that is, all of your accounts cumulatively, not individually), the excess is available to creditors in your restructuring plan. Also, if you receive payouts from a Roth IRA as income, these too may be vulnerable.

The key to a successful bankruptcy is usually detailed planning and understanding of the nuances of the process. As you can see, the details of what a person can or cannot do in a bankruptcy are very complicated, and failing to grasp the finer points of the process could end up costing you thousands. Don't jeopardize your future needlessly. Instead, you can consider consulting with an experienced bankruptcy attorney to create a detailed plan that protects your assets and creates a viable path to financial freedom.

Source: Madison.com, "Can Creditors Seize My Investments During Bankruptcy?," Sarah Szczypinski, July 19, 2017

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