Filing for bankruptcy may be an effective way of eliminating or reducing your current debt load. In some cases, you’ll be able to keep property such as a Connecticut home or car. In addition, there is a good chance that you’ll retain your 401(k), IRA or other retirement accounts. This is because they are typically considered exempt assets under the bankruptcy code.
Why some assets are exempt
State and federal bankruptcy codes offer exemptions to avoid serious financial hardship. For instance, you may be allowed to keep your car to get to work each day. In addition, you may be allowed to keep power tools, a computer or other items needed to run a business or find a job. Alternatively, you may be allowed to keep appliances and other small items simply because they aren’t worth anything.
Income may be seized
While a retirement account may be exempt from liquidation, distributions from that account aren’t always protected from seizure. If you are filing for Chapter 7 protection, you may need to include income from distributions when taking the means test. The means test is designed to determine if you qualify for a liquidation bankruptcy or if you must file for Chapter 13 protection instead.
IRA rules may vary
If you have an IRA, your account may be only partially protected in bankruptcy. As of 2022, traditional or Roth IRA accounts worth up to $1,512,350 are fully protected while SIMPLE or SEP IRA accounts are fully protected regardless of their value. However, a judge may have leeway to grant additional protection if the facts of your case calls for it.
Seeking protection from creditors may eliminate debts while allowing you to retain some or all your assets. Chapter 7 cases are typically resolved within a few months, while a Chapter 13 case may last up to five years. Bankruptcy may remain on your credit report for up to a decade. However, it may be possible to obtain credit immediately after a discharge.