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Can I Continue to Pay Into a Retirement Account Under Chapter 13?

The Law Offices of David K. Blazek, P.C. Nov. 15, 2023

Bankruptcy Chapter 13 form and penIf you have worked hard for decades to pay into your retirement accounts, including 401(k) and IRA, you might be worried about what could happen to these accounts if you file for bankruptcy. Another question that may arise when someone who has accumulated significant retirement funds files for bankruptcy is, “Can I continue to make contributions to my retirement accounts if I file for bankruptcy under Chapter 13?”  

Understandably, you do not want your bankruptcy to offset your long-term financial health, which is why you may be interested in continuing to pay into your retirement accounts while making payments under your repayment plan. The attorney at The Law Offices of David K. Blazek, P.C., can explain how bankruptcy affects your retirement accounts and whether it would be wise to continue making contributions to your retirement accounts during your repayment plan. The law firm has an office in Tampa, Florida, but serves clients in the surrounding area, including Jacksonville, Orlando, and Miami, as well as communities in Georgia, including Atlanta, Columbus, and Macon.  

Are Retirement Accounts Protected in Chapter 13 Bankruptcy?

Yes, most of the debtor’s retirement funds, including 401(k) and IRA, are protected from creditors and are not accessible to the trustee assigned to your bankruptcy case once you file under Chapter 13. Retirement accounts are protected by federal bankruptcy laws, which means it may not be a good idea to use your retirement funds to pay off debts.  

Once you take money out of your retirement accounts to pay off debts, the funds may lose the protection granted by federal law. In addition, by withdrawing funds from your retirement accounts, you may be required to pay a 10% tax penalty. The penalty, in turn, may cause you to incur more debt, making your financial situation even worse.  

Can You Continue Making Contributions to Retirement Accounts?

When you file for Chapter 13 bankruptcy, none of your assets are taken from you, including your retirement accounts. When proposing a repayment plan under Chapter 13, the monthly amount is determined by your income. The filer’s retirement accounts are not taken into account when determining the monthly payment unless they specifically want them to be considered.  

But what about paying into my retirement accounts during my Chapter 13 bankruptcy case?” you may wonder. You need to understand that Chapter 13 bankruptcy is about repaying all, or a significant portion, of your debts over the course of three to five years. In other words, the primary goal of filing for bankruptcy under Chapter 13 is to use all of your disposable income to repay your creditors. By making voluntary contributions to your retirement accounts, you reduce the amount of money your creditors will receive under the repayment plan.  

Any voluntary contributions to your retirement accounts while repaying your debts under Chapter 13 bankruptcy may be deemed unreasonable by the bankruptcy trustee or court. However, there may be exceptions to the general rule. For example, if the person who filed for bankruptcy under Chapter 13 keeps their expenses as low as possible and is nearing retirement, the court may allow them to make certain contributions to their retirement accounts to improve their retirement outcome. Another exception is when an employer requires their employee, who filed for bankruptcy, to make contributions to retirement accounts as a condition of employment.  

Since everyone’s situation is different, you need to consult with an experienced attorney to understand whether or not you should continue to pay into your retirement accounts while making monthly payments to creditors under Chapter 13 bankruptcy.   

Reliable Legal Advice You Can Trust  

Are you considering filing for bankruptcy under Chapter 13 but do not want to jeopardize your future retirement? An attorney at The Law Offices of David K. Blazek, P.C., can listen to your concerns and explain what you can do to preserve your retirement savings while reorganizing your debt through Chapter 13 bankruptcy. Schedule a free consultation with attorney David K. Blazek to discuss your particular situation and explore your options.