Bankruptcy and investments

Debtors in Florida can use personal bankruptcy, either Chapter 7 or Chapter 13, to manage or settle their debt. However, they should be aware of which of their long-term investments may have to be included in the restructuring of their debt or which may be subject to liquidation.

The Employee Retirement Income Security Act safeguards investments if the investments are sponsored by an employer or if they are included in section 401(a) of the Internal Revenue Code. This means that creditors are usually prohibited from pursuing the 401(k) retirement plans of debtors in bankruptcy. However, if all other avenues of collections have failed, the IRS may levy the funds in order to collect on delinquent taxes.

There are also protections in bankruptcy for Roth and traditional IRAs, but the protections are not limitless. After the $1.3 million exemption cap for all of the IRA assets an individual owns, the rest of the funds can be included in bankruptcy to apply to debts.

People who are self-employed and have self-employed plans or SIMPLE IRAs will not have to worry about the funds being included in bankruptcy, regardless of how much money is in the accounts. This is because the IRA limitation does not apply to those plans. However, as with Roth and traditional IRAs, if any withdrawals are made from an SEP or SIMPLE IRA during bankruptcy, the amount that is withdrawn will be considered non-exempt income and can be included in bankruptcy.

People with a steady stream of income who are seeking ways to manage their debts can turn to a bankruptcy lawyer, who may recommend filing for Chapter 13 bankruptcy. The lawyer may work with a client to create a manageable payment plan to stop foreclosures, creditor harassment, wage garnishment and debt-related lawsuits and to reduce interest payments and pay off secured debt.