- When you file for Chapter 7 bankruptcy, you can lose some of your property when the bankruptcy trustee liquidates it to pay off your creditors. While much of your property can be liquidated, certain items cannot be taken; these items are exempt. Each state has rules regarding what can be taken by the bankruptcy trustee and what can be kept by the person filing for bankruptcy. For example, most states have an exemption that allows you to keep a certain amount of equity in your home.
- When you file for bankruptcy, one of the exemptions that you can take advantage of is the retirement account exemption. When this happens, the bankruptcy court will not take the money in your account --- and your creditors cannot come after it, either. Once the bankruptcy is final, you will still have the retirement account intact, even if much of your other property has been taken.
- One of the common mistakes that people make in financial planning is using their retirement money to pay off debt. For example, they might take out a 401(k) loan to consolidate debt accounts. While this might seem like a solid strategy, it can actually work against you. Instead of wasting your retirement money on paying off debt, you could simply file for bankruptcy and get rid of the debt if it becomes too much to handle.
- When you file for bankruptcy, you will have the opportunity to claim all of the property that you would like exempted from liquidation. At the time of filing, you will need to fill out a form that includes a list of property that should be included. If you are working with a lawyer, you can get help figuring out exactly what your state allows to be exempted. If you are doing the job yourself, you will need to check your state laws to see exactly what can be exempted. Then the bankruptcy court will review your exemptions before approving them. (See References 1)