In bankruptcy, the courts review your assets to determine your ability to pay back your debts. If you have money set aside in retirement accounts, funds are usually safeguarded from your creditors because of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Some accounts have more protection than others, so it is essential to know where your money is most secure.
Traditional retirement accounts
Federal law protects accounts that exist as a means for retirement savings. As long as the account follows the regulations of the Internal Revenue Code of 1986, creditors can not access the following types of accounts:
- Roth IRAs
- Traditional IRAs
- Profit-sharing plans
Special income accounts
While saving money is essential for retirement, you may also rely on income payments from other resources. Your retirement benefits might include money from accounts like:
- Veterans’ retirement benefits
- Firefighters’ and first responders’ retirement plans
- Social Security
- Pension plans
All of these accounts are also protected from collection activity during bankruptcy.
If you choose to keep your retirement savings in a traditional bank account, only a portion of that money is off-limits to creditors. Texas allows up to $13,500 in the bank as a special exemption in bankruptcy. Any amount above that limit is subject to collection.
Life insurance plans are another way to save money. Term life insurance does not have any cash value and is not included when calculating your assets. On the other hand, whole life insurance carries a cash value that is accessible before death. While whole-life policies are assets, creditors cannot access funds from unmatured policies.
Knowing which retirement accounts are accessible to creditors during bankruptcy may allow you to choose options that better safeguard your money.