I bought some stuff the other day from a guy who told me he was going through bankruptcy. After a bit more talking, he told me that he had over half $1 million invested in retirement.
My question is is bankruptcy common and if it is, how is it possible for someone who clearly has half $1 million to go through it if he has shown that he has the money and or the resources to clear his debt. Or was he lying?
Posted by gear123456789
8 Comments
Retirement accounts are generally not touchable by the bankruptcy process. He may have a lot of money saved that he is unwilling or unable to touch. Meanwhile, he has debts beyond his ability to pay with his available non-retirement funds.
Retirement assets are generally protected in bankruptcy, for good reason. Then you just have someone the government has to care for in their old age.
One of the most common causes of bankruptcy is medical debt. Doesn’t make sense to clean out your retirement for that.
IIRC, 401k and IRA accounts are typically protected from bankruptcy up to about $1.5 million dollars between all accounts. It could in theory be possible to max out annual contributions aggressively to try to strain yourself to the point of bankruptcy while still maintaining a decent amount in protected accounts, although that sounds like an incredibly insane thing to attempt
(Or sh*t really hits the fan and you lose a job and can’t find work for years, causing you to draw out all of your taxable/cash accounts, triggering bankruptcy)
Often, pensions are protected from bankruptcy and creditors. So you can go through bankruptcy and they can’t touch your pension (depends on jurisdiction and type of pension).
Your 401k is protected from bankruptcy. Bankruptcy also doesn’t mean you pay nothing, there are different types.
Absolutely possible but most people don’t know this before they file. In Illinois, you can exempt $1.7 million in tax advantaged retirement accounts (401k, IRA, Roth IRa, etc.) per person per case.
I have seen thousands of cases though and almost all of the folks filing have cashed out retirement funds before they call our office. It’s really sad that these protections exist and people are unable to take advantage of them.
Only a handful of cases I have seen have there been people with significant retirement savings.
Bankruptcy is not uncommon. Nearly 600,000 individuals did it last year.
Certain assets are protected during bankruptcy, – different laws for different states. Retirement accounts, primary residence, tools of the trade and vehicles are protected assets.
Depending on your income, debt, equity, etc. You might qualify for a Chapter 7 bankruptcy where you keep everything and discharge the debt or a Chapter 13 bankruptcy where you make a deal to repay some of the debt and discharge the rest.
My friend working in credit agency told me it was way more common than we could Imagined