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Some savings and investments vulnerable during bankruptcy

When there's a bankruptcy filing in California, the court's trustee will scrutinize the financial assets of the debtor. Although federal and state laws build in some protections for certain retirement accounts, real estate and college savings for children, exceptions to the rules could provide creditors with access to investment funds.

In general, the federal Employee Retirement Income Security Act removes 401(k) savings from consideration during bankruptcy proceedings. For people who owe taxes, however, the Internal Revenue Service could make a claim upon a 401(k) plan. As for regular or Roth IRAs, the law exempts personal savings approaching $1.3 million, but funds beyond that might be used to pay debts. People who qualify to make withdrawals from these accounts should know that the money could be considered income and therefore exposed to creditors' demands. Similar regulations apply to self-employed plans.

Most pensions enjoy protection from bankruptcy actions, specifically plans created under law sections 401, 403 and 408 as well as other government-sponsored plans. Profit sharing and stock purchase plans through employers typically have no protections. A bankruptcy plan cannot touch money placed in 529 college savings plans except for funds deposited within two years prior to filing for bankruptcy. The protection of real estate or lack thereof depends on the type of bankruptcy.

A person experiencing financial problems could speak with an attorney about legal approaches to debt relief. An analysis of income and assets by an attorney could inform a person about how a bankruptcy filing could impact investments and home ownership. Advice from an attorney could help a person make a decision about how to proceed. If filing for bankruptcy is desired, an attorney could prepare court paperwork and manage interactions with creditors and the court trustee.

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