Protecting Retirement Funds in Bankruptcy: What You Need to Know

Protecting Retirement Funds in Bankruptcy: What You Need to Know

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For some people, bankruptcy can provide a fresh start, a way out of a bad financial situation that has no other solutions. Bankruptcy can be a complicated process, though, since there are so many factors at play.

One of the most common questions that’s asked by people who are considering bankruptcy is whether they have to give up all their assets when they file — or whether all of their assets will be included in the bankruptcy assessment.

There isn’t a simple answer to that question, since there are different exemptions that exist for different types of assets. 

That being said, most retirement savings accounts are protected in bankruptcy. There are limits on those exemptions, though, as well as consequences for withdrawing any retirement money before bankruptcy.

There are universal rules and protections in place in federal law for individuals who are filing for bankruptcy. This includes protection from creditors who might try to go after your retirement savings to satisfy outstanding debts.

Bankruptcy exemptions can vary by state, of course, with some states providing more protection for retirement accounts than others do.

We take a deeper dive into this issue below.

Types of Retirement Accounts and Their Protection

The first thing to understand is that not all retirement accounts are the same, and each type is treated a little differently when it comes to bankruptcy protection.

In 2005, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act into law. That essentially guaranteed substantial protection for all types of IRAs, or individual retirement accounts, that the federal tax code recognizes.

There are limits to how much money in Traditional and Roth IRAs enjoy protection for bankruptcy. This amount is periodically adjusted for inflation, with the current value at approximately $1.51 million.

In addition, SIMPLE IRAs, SEP IRAs and many rollover IRAs enjoy full protection from bankruptcy, no matter how much money is in them.

Federal law also generally provides protection against creditors to employer-sponsored retirement plans such as 401(k) and 403(b) plans, thanks to the Employee Retirement Income Security Act. That law, passed in 1974, also provides protection to pension plans and defined benefit plans.

How Bankruptcy Affects Retirement Income

As mentioned above, the funds that are in your retirement accounts are generally off-limits to credits during bankruptcy proceedings. However, if you have already retired and are collecting your retirement benefits, those funds are considered income and could affect the bankruptcy case.

In Chapter 7 bankruptcy cases, most states will require applicants to have income that is below the median level for the region. In lieu of that, they may require you to pass a Chapter 7 means test to prove that you can’t repay your outstanding debts.

Chapter 13 bankruptcy cases use your total income to determine how the outstanding debts that you have will be paid to creditors. That’s because Chapter 13 is a reorganization of debt rather than a liquidation like Chapter 7 is.

As such, the retirement benefits you receive could factor in the income calculation, which in turn could increase how much of your outstanding debt you will have to repay.

Benefits you receive from Social Security are exempt from bankruptcy proceedings, as long as the payments you receive are kept separate from other income you have.

Protecting Retirement Funds Before Bankruptcy

Before you file for bankruptcy, it is generally a good idea to meet with an experienced bankruptcy attorney who can help you navigate all federal, state and local laws. After fully analyzing your financial situation, they can help guide you on how to best protect your retirement assets from creditors.

While each individual case will vary, there are some general things that will apply to everyone.

For example, it may not be the best option to take money out of your retirement account to pay down your debt, as this could affect the exemptions you enjoy under federal and state bankruptcy law.

That’s why it’s so important to understand the potential consequences of withdrawing your retirement funds before you file bankruptcy, as it can significantly affect the outcome.

As mentioned earlier, since Social Security benefits are exempt from bankruptcy as long as the funds are kept separate from other income, it’s generally a good idea to have that money deposited into a separate bank account from all other money. This will ensure that you enjoy the full benefits of the bankruptcy protections for retirement funds.

State-Specific Exemptions for Retirement Funds

In addition to federal law, many states also have bankruptcy exemptions in place that protect state, county and city retirement accounts. Those who use the bankruptcy exemptions that are provided by their state are also allowed to use bankruptcy exemptions that are provided by the federal government.

Keep in mind that some states — including Texas, Hawaii and Arizona — offer additional protections for retirement accounts from creditors in bankruptcy cases. So, if you want to protect your retirement funds as much as possible, it’s crucial to understand what exemptions apply to you in your state and situation.

Lawsuit Protection for Retirement Accounts

Not all retirement funds are protected from lawsuits, though.

Employer-sponsored retirement accounts do provide some protection from these situations. However, IRAs aren’t exempted from federal lawsuits.

States also have varying takes on how IRAs are protected from lawsuits. One thing creditors can’t do, though, is seize retirement assets through a lawsuit for nonpayment of credit card debt.

The Importance of Professional Advice

As you can see, bankruptcy law can be quite complicated — and all of this just has to do with protecting your retirement assets. That’s why it’s so important to seek professional advice if you are considering whether bankruptcy might be right for you.

A knowledgeable and experienced bankruptcy attorney can provide invaluable insight and assistance, helping you to understand all applicable bankruptcy laws and then guiding you through the process from start to finish so your assets are well-protected.

The best way to ensure you’re making the most informed decisions is to consult with a local bankruptcy lawyer. Make sure that the bankruptcy lawyer you seek advice from is experienced and specializes in bankruptcy law in your state. 

They are the ones who will be best prepared to answer your specific questions about filing bankruptcy and how to best protect your retirement funds.

Trust the Bankruptcy Law Experts at Babi Legal Group

Filing for bankruptcy can affect your retirement savings as well as your income. However, there are protections in place for both Chapter 7 and Chapter 13 bankruptcies that can allow you to keep the assets you have in retirement accounts.

Some non-qualified accounts might not be protected, though, and the rules may differ depending on the state in which you live.

Consulting with an attorney who’s a bankruptcy expert can help to protect your assets, navigate all applicable rules and ensure you’re making informed decisions about your retirement funds.

At Babi Legal Group, we have more than 10 years of experience in bankruptcy law and can advocate for you and your rights. For more information, please contact us today.

How Predatory Lending Practices Lead to Foreclosure: A Grim Realty

How Predatory Lending Practices Lead to Foreclosure: A Grim Realty

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Despite regulatory measures meant to prevent it, predatory lending is a major problem in the U.S. today. People are sometimes desperate to purchase a home or are uneducated on specific details of mortgages, and some lenders seek to take advantage of that.

Predatory lending refers to any unfair, deceptive or abusive loan terms that predatory lenders impose on borrowers. Most of these loans will have high interest rates and fees, might strip the borrower of the equity in their home or even place a creditworthy borrower in a loan that’s rated for people with lower credit.

These lenders seek to take advantage of someone’s lack of understanding of financial vehicles by using aggressive sales tactics to get them to agree to something that isn’t in their best interest.

There are many different types of predatory lending practices, including subprime credit cards, overdraft loans and payday loans — all of which have interest rates that can only be termed as unreasonably high.

Anyone can become the victim of predatory lending, regardless of their income, demographics or education level. Understanding what predatory lending is, and what it can result in, is essential to avoiding signing on the dotted line for one of these loans.

Predatory Lending Tactics

Predatory lenders are looking to do one thing — take advantage of people who are vulnerable to lend them money at unreasonable terms.

“Vulnerable,” in this regard, can refer to many different people in many different situations. Vulnerable populations for predatory loans include people who have limited access to financial education, who are in a desperate situation when it comes to their housing and/or have low credit scores and, as a result, fewer options for credit than others.

Predatory lenders seek out people in these populations and then use deceptive practices to make them feel as if they’re getting a good deal. In reality, though, they take advantage of borrowers’ financial struggles, and profit from them, with high interest rates, exorbitant fees and other unfair loan terms.

These lenders know exactly what they’re doing, and they play to these borrowers’ emotions and situation. They might use aggressive sales tactics, exploit borrowers’ lack of understanding, and even ignore or hinder a borrower’s ability to repay debts.

Some even hire mortgage brokers to specifically target certain borrowers so they can sell them predatory loans.

One common tactic that these lenders use is called loan flipping. This occurs when a lender refinances a loan with a higher interest rate and fees, which ultimately hamper’s the borrower’s ability to repay the loan.

The Impact of Predatory Lending

There are many impacts of predatory lending, both on a micro and macro level. 

From a micro perspective, predatory lending can have a huge negative impact on individual borrowers. It can lead to them entering a debt spiral and experiencing significant financial struggles, which can ultimately lead to foreclosure for borrowers.

Not only can this result in borrowers losing their home, it can also create significant mounds of debt, financial instability and, in the worst case, even bankruptcy.

From a macro perspective, predatory lending can exacerbate social and economic inequalities, which then perpetuates cycles of financial instability and poverty.

That’s because predatory lenders often target minority groups, including ethnic and racial minorities, because they commonly have limited access to financial and credit resources.

Who is Affected by Predatory Lending?

While anyone can technically be affected by predatory lending, minority groups and those of lower economic standing are the ones who are often targeted by predatory lending. That’s because, in essence, these lenders rely on having an advantage of information over their borrowers, and these borrowers typically have less information and knowledge about finances and credit than others do.

In addition to minority groups, low-income families and individuals are often the target of predatory lending practices. So, too, are elderly homeowners who might not only not be “up-to-date” on predatory lending tactics, but also have limited access to additional credit.

Predatory lenders take advantage of these vulnerabilities, and much more, to prey on borrowers who often don’t know any better. That’s why anyone can be a victim of this type of lending, regardless of their income, demographic background or education level.

Prevention and Protection

Since predatory lending relies on a lack of information and education on the part of borrowers, the best way to avoid a predatory loan is to be educated about them. The more knowledge you have about predatory loans, and the more research you do about them, the better prepared you will be to avoid them.

In addition, it’s important to know what your credit rating is so you can identify any potential issues before even applying for a loan. Federal law allows all U.S. residents to obtain a free copy of their credit report at annualcreditreport.com.

When you are presented with a loan offer, it’s important that you read all the documents carefully and understand all of the terms before you sign your name on the dotted line. 

If you want more information or resources about mortgages, you can always seek help from credit and housing counselors, who can help you decide whether a loan is right for you.

Ultimately, it’s important to trust your instincts and ask questions. If a deal sounds too good to be true, it probably is.

Reporting and Addressing Predatory Lending

If you suspect that a company is using predatory lending practices, you should report it to the proper agencies. There are actually a few agencies that can help you in this regard, both from the federal and state level.

The Consumer Financial Protection Bureau (CFPB) accepts complaints on its website and over the phone. So does the Federal Trade Commission (FTC), which is an agency that’s dedicated to protecting U.S. consumers.

Legitimate banks, lenders and credit unions should all also have a regulatory agency that is responsible for oversight. You can find out which agency that is and report them there, too.

Every state should also have a consumer protection organization. In Washington State, for instance, the Washington State Department of Financial Institutions (DFI) is responsible for regulating and enforcing all lending practices.

By filing complaints with the appropriate agencies, you can help to hold predatory lenders accountable and prevent other borrowers from falling prey to their practices.

Seeking Justice and Compensation

If you believe you’re a victim of predatory lending and can prove that your lender violated federal or local laws, it might be a good idea to file a lawsuit. A good place to start is to contact your state’s consumer protection agency, as they can provide you proper guidance and support.

Federal law, and most state laws, provide consumers with the right to file a lawsuit against predatory lenders and seek compensation for damages incurred. It’s possible that if you’ve been a victim, you could gain compensation or some other form of relief.

If you believe you’ve been a victim of predatory lending in Michigan, contact the experts at Babi Legal Group. 

The Role of Regulation in Combating Predatory Lending

Predatory lending was a major cause of the 2008 financial crisis. In fact, subprime mortgages were the main driver of the U.S. economy, and many economies around the world, crashing.

To prevent a similar situation from happening in the future, the federal government passed the 2010 Dodd-Frank Act, which not only established provisions that sought to minimize predatory lending but also created the CFPB.

Many states have also established anti-predatory lending laws, with some outlawing practices such as payday lending completely.

Other agencies that play a role in regulating and enforcing lending practices include the FTC and Housing and Urban Development (HUD). Laws such as the Equity Protection Act also work to protect borrowers from predatory lending practices and other abusive loan terms.

While state-specific and federal laws, as well as federal agencies, were created to combat predatory lending, protections and rules are always subject to change.

Seek Justice and Compensation if You are the Victim of Predatory Lending

Predatory lending is a serious issue that can have devastating consequences for individual borrowers, entire communities and society at large. The key to avoiding predatory loans and protecting yourself from them is to increase education and awareness about them.

Regulation and enforcement also play essential roles in not only combating these predatory practices but also in promoting fair lending practices.

If you believe you’ve been the victim of predatory lending, you should seek justice and compensation, as well as report the practices to the relevant authorities.

In Michigan, the experts at the Babi Legal Group can help you with your claim. We have more than 10 years of experience in debt collection, debt settlement and bankruptcy, with another 20 years of experience in real estate.

To learn more, contact us today.