How Bankruptcy Affects Retirement?


It is a well-known fact that debt can seriously hurt an individual’s savings, but as more and more of the Baby Boomer population is entering retirement, the question of whether this debt can harm their ability to retire is becoming more of a concern.

According to a 2010 study conducted the University of Michigan School of Law, seniors are the fastest growing group of bankruptcy filers in the United States. In fact, the study showed that the number of bankruptcy filers who were over the age of 65 increased from 2.1 percent in 1991 to 4.5 percent in 2001 and then to 7 percent in 2007.

As healthcare costs have increased over the years, the question has been raised as to whether medical debt is the leading cause for this increase in bankruptcy filings for seniors. It appears that the main cause of this growth in bankruptcy filings has ended up being credit card debt.

Seniors have been asking how bankruptcy filings affect retirement funds, as well as social security. The following tips should shed some light on some of these growing concerns.

Retirement Funds

It is unlikely that bankruptcy will affect the senior’s actual retirement funds. This includes money saved in 401(k), 403(b), 457(b), or other profit sharing or defined benefit retirement plans in the event the filer proceeds with a Chapter 7 bankruptcy or liquidation bankruptcy.

Similarly, this money should not be touched by creditors in a Chapter 13 bankruptcy. If the filer has saved up money in an IRA, Roth IRA, Simple IRA or SEP IRA, this money is also normally exempt (“protected”) from creditors.

Current Retirement Distributions

If the filer is already taking money as income from retirement accounts, this money generally is not accessible to creditors. There are exceptions, however. If the filer is proceeding with a Chapter 13 bankruptcy, any money that he or she is receiving as income from retirement plans may be considered to determine how much the filer can afford to repay debts in the reorganization or repayment plan.

Can Creditors Take My Social Security Income?

Social Security and disability income normally is protected under federal law and cannot be garnished by creditors. However, problems arise when the Social Security money is deposited into the individual’s bank account along with other funds. It can be garnished possibly at that point.

Under a 2011 rule, however, banks must know whether an individual’s federal benefits, including Social Security, are included in an account before money can be garnished within that account. If the person’s federal benefits are in the account, two months’ worth of benefits are protected from garnishment.

It is sometimes recommended that a filer be safe with their benefits by having a separate bank account to deposit Social Security income so no questions arise with what money is included in the account.

Are Medical Debts Dischargeable?

Many seniors find themselves struggling to pay medical debts, and as a result, many hope that bankruptcy will relieve them from this burden. If the filer qualifies for Chapter 7 bankruptcy, any medical debt can be discharged or completely liquidated successfully.

If the person has put medical debt on credit cards or taken personal loans to pay it, this debt can be discharged, as well, in a successful bankruptcy.

Should Seniors Consider Filing for Bankruptcy?

Every debtor’s situation is different. Sometimes other options do exist for individuals that avoid the need to file for bankruptcy, and a bankruptcy attorney can help advise them on what options are best.

If a debtor is struggling to pay medical bills or credit card payments, bankruptcy could be an excellent way to provide some relief. The fear of losing everything should not be a deterrent to getting this relief.

Contact a bankruptcy attorney today to discuss your specific circumstances to learn what would work best for you.


An experienced Texas bankruptcy lawyer can help you with any questions you may have about how the filing might affect your retirement. Call the Law Office of Marilyn D. Garner at (817) 505-1499 NOW for a free consultation to discuss how bankruptcy may help you.

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