Let’s admit, it is essential to understand bankruptcy basics as it could be one of your legal lifelines. It is true, especially if you have debt payments to receive or are drowning in loans or debts. Though filing a bankruptcy petition or seeking legal assistance is your right, legal proceedings may have more to them, whether your money claim is for a mortgage, credit card, or student loan.

Regardless of the reason you’re filing bankruptcy, you must know what happens to your financial accounts. Here is a primer of everything you need to know about filing bankruptcy and how you can use it in your favor.

Financial Accounts in Bankruptcy- What to Expect

As you may suspect, it is not possible to keep the money in various bank accounts when filing for Chapter 7 bankruptcy. Though your money will not necessarily be wiped out, you might want to keep your accounts. However, a chapter 13 bankruptcy may leave all or some of your bank account intact. It is because the purpose is repayment, not liquidation.

The process of chapter 7 bankruptcy typically involves losing all or most of the money in the bank accounts. You can save some funds if they meet exemption criteria. Note that these criteria may vary from state to state and include;

  • Money for alimony payments

  • Cash from a pension account

  • A portion of wages

  • Disability payments

Moreover, many banks offer some reliable “set-off” rights to protect you. That means when you file for bankruptcy; they cover some or the entire amount with finance from your bank accounts if you fail to repay or are behind on repayments.

However, some banks regard your bankruptcy as loan defaulting. It doesn’t end here as some banks freeze the accounts upon discovering that you filed for bankruptcy.

What Happens To 401K Accounts in Bankruptcy

Here is some good news; your retirement or pension funds are usually safe during the course of your bankruptcy. The same does for most 401K accounts you may be holding with your former or current employers. But you need to check with your 401K administrator or employer to determine if the 401K plan qualifies under the ERISA (the Employee Retirement Income Security Act).

If, like other 401K plans, it qualifies, know that your bank account is secure in bankruptcy. But if it is not, some of your retirement accounts may be vulnerable.

What Happens To Roth and Traditional IRAs in Bankruptcy

Whether you have a Roth or traditional IRA account, IRA bankruptcy protection allows IRA (individual retirement account) owners to protect their valuable accounts from creditors in bankruptcy proceedings. All kinds of individual retirement accounts that the federal tax code recognizes enjoy considerable protection from creditors during bankruptcy.

Did you know that BAPCPA amended federal bankruptcy law in order to provide protection for as much as $1 million in assets held in either a traditional IRA or Roth IRA? And in the current 3-year period, which will end on Apr 1, 2022, both Roth and traditional IRAs are protected from bankruptcy to a dollar value of about $1,362,800 per person.

It is worth mentioning that with Chapter 13 bankruptcy, banks can’t liquidate your assets. This protects your IRAs. Plus, the funds that you withdraw from your retirement account are not as safe as your finances within it.

What Happens to Social Security Income in Bankruptcy

Your creditors can’t take social security income when you file bankruptcy. That is to say, this income or bank account is bankruptcy proof. But social security accounts may become vulnerable if you mix them with other finances.

Can Bankruptcy as a Strategy Reduce the Risks of Financial Hardships?

Relieve the Emotional and Financial Implications of Debts

Bankruptcy often has a long-lasting financial impact. It is a stay against your creditors and can help you protect your personal assets. When you file for bankruptcy, the court immediately issues a stay against your debt collection. And that can protect you from emotional trauma also.

If you have lost your assets to debts, it can ruin your motivation to reestablish your business. Bankruptcy, in some cases, is a way to grant you a legal stay against your creditors and gives you enough time to come up with the right plan. It can allow you to regain your motivation somewhere, and you won’t have to struggle to collect enough capital.

Chapter 13 bankruptcy laws offer a debt repayment plan. Chapter 7 bankruptcy, on the other hand, eliminates utility bills, old income taxes, and credit card debt. Of course, no one wants to spend almost a decade looking for capital to reestablish a business. Therefore, you should consider bankruptcy when making financial decisions to fight financial hardships.

May Help You Become More Vigilant for the Signs of Trouble

Being confident about your potential and abilities to achieve the milestones you have set for your financial goals is excellent. You are a hard worker, diligent, and know how to build your credit score. However, you need to know that being overconfident can be dangerous at times.

No matter how confident you are in terms of making financial decisions, if you miss out on the signs of trouble, it may lead to non-discharged debts.

With bankruptcy as an option, many debtors and people can become more vigilant for the signs of financial trouble in the future. It helps them improve their credit scores after filing for bankruptcy. Once they get rid of debts, they can move forward and rebuild their credits.

In short, bankruptcy can help you anticipate and handle financial issues without leaving anything on chance.

Summing Up

All in all, bankruptcy is sometimes hard to survive. Therefore you must know everything about it before filing a claim. You must know how to reduce its risks and how it can help you overcome debts.

One comment on “What Happens to Your Financial Accounts in Bankruptcy? (Guest Post by Lyle Solomon of Oak View Law Group)”

  1. 1
    Benjamin Garcia on July 19, 2022

    Thank you for this interesting info, Lyle! Filing for bankruptcy is another opportunity to start again. Most of your unsecured debts are discharged under Chapter 7, whereas Chapter 13 lets you implement a new repayment plan option. Through bankruptcy, you successfully restrain your creditors and get the chance to improve your credit score through sensible financial planning in the future.

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