Your Retirement Plan in Bankruptcy

How will bankruptcy affect your 401(k), IRA, pension, and other retirement plans?

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If you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy, you get to keep your pension and retirement plan funds, with a few limitations. If you are considering bankruptcy, you should learn about these limits.

(To learn about the basics of Chapter 7 and Chapter 13 bankruptcy, see Nolo's articles A Chapter 7 Bankruptcy Overview and An Overview of Chapter 13 Bankruptcy.)

Retirement Accounts Are Exempt Property

Congress overhauled the bankruptcy laws in 2005. Under the new law, virtually all retirement account and pension plan funds are exempt from creditors, meaning you get to keep them if you file for Chapter 7 bankruptcy. In Chapter 13 bankruptcy, because your retirement accounts are exempt, they won't affect how much you must repay unsecured creditors. (To learn more about the role of exemptions in Chapter 7 and Chapter 13 bankruptcy, see our Bankruptcy Exemptions area.)

With a few exceptions, the exemption amounts are unlimited, so the entire amount of the retirement account is protected. Plans subject to this exemption include any ERISA-qualified pension plan, such as:

  • 401(k)s
  • 403(b)s
  • IRAs (Roth, SEP, and SIMPLE)
  • Keoghs
  • profit-sharing plans
  • money purchase plans, and
  • defined-benefit plans.

Some Limitations to Exemptions for Traditional and Roth IRAs

The only limits to this broad rule involve traditional and Roth IRAs. For IRAs and Roth IRAs, the exemption from creditors (the amount the bankruptcy court cannot touch) is limited to $1,245,475 per person. If you have more than this in your retirement accounts (the exemption applies to the combination of all of your retirement plans -- you cannot exempt $1,245,475 for each plan), the excess can be taken by the bankruptcy court to pay back your creditors.This amount is adjusted every three years to account for cost of living increases. 

Although the funds in your retirement accounts are exempt from creditors (subject to the limitations discussed above), retirement benefits that are paid to you as income are not exempt. In a Chapter 7 bankruptcy, the bankruptcy court cannot take any retirement benefits that are necessary for your support, but it could take amounts over and above what you need for your support to repay your creditors. For the purposes of Chapter 13 bankruptcy, this kind of retirement income is included in your repayment plan and will help determine what portion of your unsecured debts you must repay. 

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