LEGAL GUIDE
Written by attorney Christopher M. Migliaccio | Jan 24, 2013

Bankruptcy and IRA Loans: How Retirement Loans Are Treated in Bankruptcy

If you file for Chapter 7 or Chapter 13 bankruptcy, you will still be obligated to pay any IRA loans or retirement loans that you may have. Loans from pensions and retirement plans are not dischargeable, according to Section 523(a)(18) of the United States bankruptcy code.

If you have concerns pertinent to your retirement funds, it’s best to obtain legal counsel to discuss exactly how filing for bankruptcy will affect you. For residents in and around Plano, bankruptcy attorneys Warren & Migliaccio can answer any of your bankruptcy questions.

Bankruptcy and IRA Loans: Wage Withholdings for Retirement Loans

As you file for bankruptcy, an automatic stay stops creditors from collecting from you. This will stop wage garnishments in which your employer withholds a portion of your wages to pay creditors. However, this does not apply to withholdings related to your retirement loans. These withholdings will continue even after you have filed for bankruptcy.

Can a retirement loan repayment be deducted from disposable income?

To file for bankruptcy, you must pass what is known as the means test, which looks at your disposable income after deducting necessary expenses like rent and food. Whether you can deduct these repayments from disposable income depends on the type of bankruptcy.

Chapter 7 Bankruptcy – If you’re filing Chapter 7, retirement plan repayments are not treated as a necessary expense, and therefore will not be deducted from your monthly disposable income when determining eligibility to file.

Chapter 13 Bankruptcy – If, on the other hand, you file Chapter 13, you can deduct the monthly amount that you’re contributing towards paying off any retirement loans.

Be sure that you are aware of other major differences between Chapter 7 and Chapter 13 before you decide which to file. For example, Chapter 13 involves repayment of some or all of your debt, while Chapter 7 may not. Regardless, though, your loan repayment debt is not going to be discharged.

Can creditors touch a retirement fund?

While you will still be liable to pay back your retirement loan if you file for bankruptcy, the good news is that pensions and retirement funds are generally considered exempt from creditors.

In other words, you’ll still get to keep your retirement funds if you file for bankruptcy.

This exemption holds true for any account that’s qualified by the Employee Retirement Income Security Act (ERISA), including:

  • IRAs;
  • Roth IRAs;
  • Keoghs;
  • 401(k)s and 403(b)s; and
  • pensions.

Plano Bankruptcy Attorneys Assist with Bankruptcy and IRA Loans

It’s important to understand exactly how the courts will treat your IRA loans and retirement plan loans before you begin the process of filing for Chapter 7 or Chapter 13. Ideally, you will make these considerations before taking out a loan from your retirement account to repay creditors so you make a decision that’s best for you.

Plano bankruptcy attorneys at Warren & Migliaccio can answer your bankruptcy questions, review which type of bankruptcy may be best for you, and help you through the process. Call our firm at (888) 584-9614 to schedule a consultation so you can address your specific concerns about your bankruptcy and IRA loans.

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