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Understanding the impact of bankruptcy on retirement benefits

On Behalf of | Jun 9, 2020 | Personal Bankruptcy

Filing for bankruptcy is the reality for many people in California who desire to lessen their debt and start over. While bankruptcy provides notable relief from pressing financial obligations, people should understand its impacts as well.

One concern people may have is how filing for bankruptcy will affect the retirement benefits they have worked hard to accumulate. Understanding the correlation between these two elements may help people make wiser decisions about how to proceed.

The purpose of exemptions

Bankruptcy exemptions allow people to maintain some control over their financial assets. This enables them to have adequate resources to continue living their lives and have enough to start over again. According to Smart Asset, exemptions come in the form of home equity, clothing, vehicles and property among other things. A fixed dollar amount for each of these exemptions ensures that people do not exceed a specific monetary maximum in order to maintain their possessions within each category. Depending on state laws and a person’s specific situation, the amount of stuff they are able to keep may fluctuate.

Protecting retirement benefits

The California Legislative Information informs people that Social Security benefits are exempt from bankruptcy proceedings. Unmatured life insurance policies are protected too. All public retirement benefits including pensions and annuities, as well as union paid benefits and incentives, are exempt as well.

Under the section that discusses the outcome of private retirement accounts, profit-sharing plans designed with the sole purpose of sustaining retirement, are exempt. While there are some exceptions, the accumulation of assets and benefits with the intent of utilization for retirement, are exempt from use in paying back debt during bankruptcy.