When bankruptcy is a possibility, people who live in Illinois should seek the advice of a Chicago bankruptcy attorney to discuss how their retirement funds will be treated. If you're worried about losing your retirement funds by filing for bankruptcy you may be surprised that a bankruptcy may be the best thing you can do to save your retirement funds.
IRAs
Some people believe that they should handle the debt they are having trouble with by taking money out of their retirement accounts. This is generally not a good strategy as most individual retirement accounts, or IRAs, are protected from a bankruptcy seizure. And since you'll typically have to pay a penalty for withdrawing funds from your retirement accounts you actually may end up in a worse position if you use your retirement fund to pay debts rather than filing for bankruptcy.
Your attorney will be able to review all of your accounts individually and let you know if they're exempt from seizure but generally most 401K, 403B, Keoghs, profit sharing, Roth, SEP, SIMPLE and ERISA funds are exempt. There may be other plans that qualify as exempt and because everybody's financial situation is different it's best to consult with a bankruptcy attorney.
As a blanket statement, there is one time where the money in a retirement account is definitely not safe from bankruptcy seizure, this is when the total amount of these accounts is $1,095,000 or greater. In this situation the bankruptcy trustee may decide to use some of these funds to pay off debts.
Arming yourself with knowledge about how bankruptcy will treat your different funds and assets is essential to helping you make a sound decision about filing. Like we mentioned above, not understand what funds are exempt and cashing them in to pay debt can leave you in an ever worse situation in the long run. Even cashing in a retirement fund and putting it in a regular account makes it free game for your creditors.
The catch is for people who think they know too much and try to take this too far and hide money in an IRA. The bankruptcy trustee will see through these tricks and seize that money to pay off your debts. Make sure you weigh your options carefully with a Chicago bankruptcy attorney.