Retirement should be a time of comfort and security, but for many, financial challenges threaten this stage of life. At Law Offices of Terrence Fantauzzi, we often encounter clients who are considering bankruptcy as a means to safeguard their retirement funds. This blog explores how bankruptcy can be a strategic option for preserving your retirement savings. Contact Law Offices of Terrence Fantauzzi at (909) 552-1238 for a legal consultation with a bankruptcy attorney.
The Increasing Need to Work Beyond Retirement Age
In the United States, a growing number of seniors find themselves working well past the traditional retirement age. Economic factors, including insufficient Social Security benefits, compel many older Americans to remain in the workforce. The average Social Security retirement benefit, which falls below $1,800 monthly, is hardly enough to cover the high living costs in many areas.
How Retirement Accounts Are Protected
Most employer-sponsored 401(k) accounts are shielded from creditors, meaning debts such as unpaid medical bills or defaulted loans cannot be collected against these retirement funds. However, Individual Retirement Accounts (IRAs) and other private retirement plans don’t enjoy the same level of protection. California law safeguards the amount necessary for the debtor’s and their dependents’ support upon retirement, but this is subject to various factors like age, income, and other resources.
The Risks of Cashing Out Retirement Accounts
Often, individuals in debt consider using accessible retirement funds to pay off debts. Early withdrawals from retirement accounts, such as cashing out a 401(k) or taking funds from an IRA, come with penalties. Such decisions can be detrimental, especially for those nearing retirement age, as rebuilding these funds becomes increasingly challenging.
Vulnerability of Retirement Distributions
While funds in retirement accounts are protected from creditors, this protection ceases once the money is withdrawn. For example, if you withdraw your 401(k) funds and deposit them into a bank account, they become accessible to creditors. This situation can significantly reduce the funds meant for retirement.
Bankruptcy as a Shield for Retirement Funds
In California, the average retirement account balance is around $450,000. This amount, combined with Social Security benefits, can provide a stable retirement. However, substantial debts, such as medical or credit card debts, can jeopardize these savings. Filing for bankruptcy can discharge these debts while protecting your retirement funds.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy offers a swift way to eliminate unsecured debts, including medical and credit card debts. It allows the protection of retirement funds, even those in non-ERISA accounts like IRAs, up to a certain limit.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy also protects retirement accounts but differs from Chapter 7 in dealing with secured debts, like mortgages. It can be a viable option for those facing foreclosure, allowing them to repay past-due balances over time without tapping into retirement funds.
Consulting a Bankruptcy Attorney
Understanding the intricacies of bankruptcy and its impact on retirement funds can be complex. At Law Offices of Terrence Fantauzzi, we encourage anyone struggling with debt to consult with our experienced attorneys. Our initial consultation is free, and we are committed to helping you make informed decisions about your financial future.
Bankruptcy might seem like a daunting step, but it can be a strategic move to protect your retirement savings. At Law Offices of Terrence Fantauzzi, we understand the importance of securing your financial future and are here to guide you through the process. Contact us at (909) 552-1238 for a comprehensive discussion on how bankruptcy can serve as a tool to safeguard your retirement.