Retirement Accounts

Knowledgeable Bankruptcy Lawyer Guiding Alabama Residents

When you file for Chapter 7 bankruptcy, some of your assets will be sold, and the proceeds received from the sales will be used to repay your unsecured creditors. Unsecured creditors are those to whom you owe debts that are not secured by any property. It can be challenging for some debtors to lose their property and assets in this way. However, you do receive a certain amount of protection for your property and assets in the form of bankruptcy exemptions. One category of exemptions is retirement accounts. In order to understand the effect of bankruptcy on your finances, an Alabama bankruptcy attorney at Grainger Hawley & Shinbaum, LLC can explain this group of exemptions to you and advise you on how it may be useful for your situation.

Exemptions for Retirement Accounts

In some states, you can elect to take the federal exemptions, which include exemptions for your home, cars, and personal property. In Alabama, however, you must take state exemptions to protect your property when you file for Chapter 7 bankruptcy. You can also use applicable federal non-bankruptcy exemptions, which protect federal retirement accounts.

The state increased bankruptcy exemptions in 2015. The new exemptions protect $15,000 of equity in your home and $7,500 of equity in your personal property. If you file for bankruptcy jointly with your spouse, you can protect $30,000 of equity in your home and $15,000 of equity in your personal property.

In Alabama, all tax-exempt retirement accounts that are qualified under the Internal Revenue Code are exempt from being sold to repay your unsecured creditors under Alabama Code 19-3B-508. The code provides for an exemption for any benefits provided under a plan that includes a trust that constitutes a “qualified trust.” This includes IRAs, Roth IRAs, and other retirement accounts that are qualified by the Internal Revenue Code. The statute does not specify any monetary limits on the amount within the account that is exempted. State Employees Retirement Systems accounts and benefits are protected under Alabama Code 36-27-28. Teachers Retirement System accounts and benefits are protected under Alabama Code 16-25-23.

Bankruptcy exemptions also affect Chapter 13 bankruptcy. While exemptions help you keep a certain amount of property in Chapter 7, exemptions affect how much you pay unsecured creditors in Chapter 13.

Unlike Chapter 7, Chapter 13 bankruptcy is designed to help you keep your property, but only if you pay back a certain amount of your debt on a monthly basis through a structured plan that must be completed in 3-5 years. The amount of your monthly payment in a Chapter 13 plan is dependent on your income, expenses, property, and debts. You usually have to contribute all of your disposable income to plan payments. The amount you must pay to unsecured creditors in the plan is determined by both disposable income and nonexempt assets. However, since your retirement accounts are exempt in Alabama, the amount in them will not affect how much you must repay unsecured creditors.

The funds within your retirement accounts are exempt from creditors with certain limitations, but the retirement funds that are distributed to you as income are not exempt. During a Chapter 7 bankruptcy, the court will leave retirement benefits that are necessary for you to live, but it may take any benefits that exceed what will go towards necessities like food and shelter in order to pay off a certain amount of your debt. In a Chapter 13 bankruptcy, the retirement income that is paid to you will be included in your repayment plan in order to determine what you can afford to pay to creditors.

Seek Guidance from an Alabama Attorney for Your Bankruptcy Case

How your retirement accounts and the funds in them will be affected may be a crucial part of your decision about whether to file for bankruptcy. At Grainger Hawley & Shinbaum, LLC, an Alabama bankruptcy lawyer can advise you on the effect of this process on your retirement accounts. We maintain offices in Troy, Prattville, and Montgomery. Call us at (334) 260-0500 or contact us online to set up a free consultation with a debt relief attorney.