In 2016, over 770,000 people in Virginia and throughout the country filed for Chapter 7 and 13 bankruptcy. In a Chapter 7 bankruptcy, nonexempt assets are sold with the proceeds going towards paying off creditors. While unsecured debts can be eliminated, it may not be possible to discharge secured debts or student loan balances. Those who file for Chapter 13 bankruptcy reorganize and repay their bills over a period of up to five years.
Thanks to the Employee Retirement Income Security Act, or ERISA, a 401(k) is usually exempt from creditors, and other similar programs may be exempt as well in a bankruptcy. However, the IRS may be able to take money out of a 401(k) to pay back taxes, but this is generally only done if other options have been exhausted. It is also important to note that the IRS cannot take a person’s money unless he or she can access it.
For instance, if an individual cannot withdraw funds from his or her 401(k) until age 59½, the IRS can’t levy those funds before then regardless of when the bankruptcy case was filed. Money invested in an IRA is protected up to $1.3 million, but protections may be lifted if withdrawals are made from the account. Self-employed IRAs offer unlimited protection, but the same rules apply to any funds that are withdrawn from the account.
Debtors who are looking to stop creditor harassment or protect their property may wish to consider filing for bankruptcy. Doing so may put an end to phone calls and letters from creditors as well as prevent a foreclosure or repossession during the repayment period. An attorney may be able to inform his or her clients about these benefits, what types of financial assets may be exempt from creditors and the different types of bankruptcies they may want to file.