Staring down the tunnel of debt and declaring chapter 7 bankruptcy is absolutely overwhelming at times. As a result, many people try to lessen the blow by cashing in their retirement funds or other forms of investments. There is a common belief that bankruptcy may be held off by dipping into invested funds early and making some payments to creditors. But, there is one very good reason not to: those investments are exempt.
In 2005, Congress overhauled the bankruptcy laws to include 401(k), IRAs, profit-sharing plans, and several other investments in the list of exempt funds. So what does this mean? It means that if you go ahead and cash the investments during a chapter 7 bankruptcy, the cash could end up belonging to the creditors, rather than to you. If the investments are cashed out at the wrong time, they could even negatively affect your case when filing for chapter 7 bankruptcy. The court-appointed trustee or judge may find that you have misrepresented your level of debt. Be sure to talk to your Dallas bankruptcy attorney regarding any questions about cashing out or holding on to the investments.
The good news is that, if it stays in investment form, no one can take that money from you. There are only a few limits to the exemption. One is imposed on traditional and Roth IRAs. These are capped off $1,245,475 per person, and if there is any more than this in the retirement plan account, it could be garnished by the creditors. Thankfully, this is an extremely healthy sum for most and nothing to worry about for many people filing for chapter 7 bankruptcy. And, while the court may not take any money that you need to live from retirement funds that are currently being paid to you, they may feel the need to take anything that is deemed to be over that amount.