In an era of price inflation, retirees on fixed incomes might be concerned about the prospects of bankruptcy and the loss of their savings. However, bankruptcy remains a viable option for retirees who cannot cope with unmanageable debt. Most retirement accounts and pensions are protected from creditors during a bankruptcy. Meanwhile, most of your debts, including credit card balances and medical bills, may be eliminated in bankruptcy.
If you are a Florida retiree dealing with insurmountable debt, an experienced bankruptcy attorney at Florida Law Advisers, P.A. can help you seek a solution to your financial problems. We may be able to help you obtain an out-of-court settlement agreement between you and your creditors that stops debt collector harassment directed at you. If bankruptcy is appropriate in your case, we will work with you to make the bankruptcy process as smooth as possible.
An experienced bankruptcy attorney at Florida Law Advisers, P.A., can review your situation and help you make financial decisions with your retirement in mind so you can move forward under a Chapter 7 or Chapter 13 bankruptcy filing while protecting your retirement savings.
Contact us today to learn more in a free consultation with an experienced Orlando bankruptcy attorney at Florida Law Advisers, P.A.
How Personal Bankruptcy Works in Florida
When you obtain a Chapter 7 bankruptcy, the bankruptcy trustee sells certain of your assets to pay your creditors, and the court discharges the unsecured debt you have. Filing a Chapter 7 bankruptcy also stops pending legal actions such as home foreclosure or repossession of your vehicle. A retired husband and wife may file a joint bankruptcy petition or individual petitions. An experienced Orlando bankruptcy attorney with Florida Law Advisers, P.A. can help you file with the court the required lists of your assets, debts, current income, and expenditures.
Most of your personal property is typically exempt from being seized and liquidated. But certain assets may be sold. We will help you understand which assets are subject to being liquidated. Once you are granted relief, you will no longer be obligated to pay discharged debts. Creditors can’t pursue collection action against you.
A Chapter 7 bankruptcy will discharge the following types of debt:
- Credit card balances
- Medical bills
- Past-due rent
- Past-due utility bills
- Personal loans
- Business debts
- Most attorneys’ fees
- Overpayments from government programs, such as Social Security and welfare
- Collection agency accounts
- Most auto accident claims.
Not all retirees are eligible for Chapter 7 bankruptcy. If you have a regular monthly income, you may be required to proceed under a different section of the federal bankruptcy code and restructure your debt with the goal of paying it off.
In Chapter 13 bankruptcy, you develop a plan to repay your debt in installments over three to five years. The bankruptcy court will determine that you have sufficient disposable income to make payments on your debt.
Chapter 13 typically allows discharges on certain unsecured debts, such as:
- Credit card balances
- Medical bills
- Unsecured personal loans
- Some obligations under leases and contracts.
Bankruptcy – whether Chapter 7 or Chapter 13 – will not discharge the following debts:
- Mortgages
- Alimony and child support payments
- Federal student loans
- Fines and fees related to drunk driving charges.
How Is Retirement Income Treated in Bankruptcy?
Your retirement income will be scrutinized during the bankruptcy process. If you have adequate disposable income to service your debts, you may need to file for bankruptcy protection under Chapter 13 rather than Chapter 7.
Individuals must qualify for a Chapter 7 bankruptcy by passing a means test. There are two ways to qualify:
- Your average income over the most recent six months is less than the Florida state median income for a household of the same size as yours.
- Your projected disposable income for five years after deducting certain expenses allows you to pass. This is a more complicated analysis and usually requires a small charge to prepare.
If you do not qualify under the bankruptcy means test in Florida, you may still qualify for Chapter 7 if you can show the Bankruptcy Court that you have special circumstances that make it necessary and reasonable to adjust your income calculations.
An individual who is not eligible for a Chapter 7 filing because he or she has a steady income may need to pursue a Chapter 13 bankruptcy. Your experienced attorney with Florida Law Advisers, P.A. will conduct a thorough review of your finances and determine the best course of action for you.
The primary advantage of a Chapter 13 bankruptcy is that, because you plan to repay most debts, you do not have to sell off assets you would be required to sell under Chapter 7.
How Bankruptcy Affects Existing Retirement Savings and Can Help Preserve Savings
Federal law protects most recognized retirement savings accounts – plans that meet Employee Retirement Income Security Act (ERISA) guidelines – from creditors in a bankruptcy filing.
Retirement Assets Exempt During the Bankruptcy Process
Exempt assets include the following:
- 401(k) plans
- 403(b) profit-sharing plans
- 457(b) deferred compensation plans
- Section 408 pension and defined benefit plans
- Money purchase plans
- SEP and SIMPLE IRAs
- Similar employer-sponsored, qualified retirement plans
- Most governmental plans
- Most plans that tax-exempt organizations run.
No money will be taken from these accounts to pay creditors if you file for bankruptcy.
Limits to IRA Protections in Bankruptcy
Federal law protects your holdings in traditional and Roth IRAs up to a total value of more than $1.5 million, a cap that is adjusted for inflation every three years. If you have more than one traditional or Roth IRA, the combined total is protected, not each account. The bankruptcy trustee can take any amount over the cap to repay creditors.
The current cap for traditional and Roth IRAs is $1,512,350 combined, and it will remain in place for filings made until March 31, 2025. The cap will change on April 1, 2025.
However, a traditional or Roth IRA account that was originally funded through a rollover transfer from a qualified retirement plan is fully shielded from creditors in bankruptcy.
Social Security and Veterans Administration benefits, or any local public assistance benefits you receive, are protected and will not be available to creditors in a bankruptcy.
Florida Law Protects Retirement Funds in Bankruptcy
You have further retirement account protections under Florida law. Pensions and retirement funds exempt from bankruptcy declarations in Florida include:
- Public employee retirement benefits
- State and County officer and employee retirement system benefits
- Firefighter pensions
- Municipal police pensions
- Teachers’ retirement benefits.
Retirement Account Distributions May Be at Risk, May Be Beneficial
While your retirement accounts are exempt from bankruptcy proceedings as described above, any distributions you take and/or are holding will affect your filing. For example, monthly IRA withdrawals and/or pension payments will count as income, and any retirement money held in regular bank accounts will be considered available assets.
In a Chapter 7 filing, any income or assets you have in an unprotected account beyond the amount of money required for you to pay for the basics could be claimed by creditors.
For a Chapter 13 filing, the Bankruptcy Court will consider whether you have sufficient income to adhere to a proposed payment plan. This may include retirement distributions or withdrawals, depending on whether the money is identified as part of your regular monthly income.
As your bankruptcy attorneys, we will determine what is most beneficial to you. For example, Social Security benefits are usually not counted as income for a Chapter 7 bankruptcy, but including that income is an option that may help in a Chapter 13 filing. Further, if you are taking more than the minimum distribution from an IRA or another account, there may be options for adjusting your monthly withdrawal to help or to avoid a bankruptcy filing.
Get in Touch with Our Orlando Bankruptcy Lawyers
If you are a Central Florida retiree drowning in debt and you don’t see any way to turn it around, an experienced Orlando bankruptcy lawyer with Florida Law Advisers, P.A. is ready to help you. Bankruptcy is a legal tool to help honest people deal with insurmountable debt. We can review your finances and help you make the necessary decisions to make a fresh start while protecting the retirement accounts you have worked hard to build.
If bankruptcy is the best option for you, we will help you prepare the documents required for bankruptcy filing and represent you in the U.S. Bankruptcy Court and in any negotiations with creditors. If you have income sufficient for a Chapter 13 repayment plan, we will help you develop a plan and negotiate a sound proposal. We strive to help our clients find long-term solutions to address overwhelming debt, not just temporary relief.
Contact Florida Law Advisers, P.A. today for a free and confidential consultation about your financial problems and the protections federal law and Florida statutes make available to you. Don’t put it off and let your financial problems get worse. We can help you today.