Your Pension in Bankruptcy

With few exceptions, bankruptcy law protects your pension or retirement account, so it's likely safe. But to be sure, you'll want to confirm that your plan falls into one of two categories:

• it's a plan that's automatically excluded (your plan administrator should be able to tell you the Internal Revenue code section under which your plan qualifies), or
• you can protect your plan with a state or federal exemption.

Be aware that some employment investment benefits, such as stock option plans, don't necessarily qualify for protection. Also, once you receive money from a qualifying pension plan—such as when you take a withdrawal—the funds lose the protection.

(Not sure which type of bankruptcy is best for you? Start with Should I File for Chapter 7 or Chapter 13 Bankruptcy?)

Retirement Plans You Can Keep Automatically

Under the current bankruptcy law, some retirement plans are excluded from the bankruptcy estate. If yours falls under this category, you get to keep it automatically.

Because they aren't part of the bankruptcy estate, these types of plans don't come under the control of the bankruptcy trustee, so there is not, technically, a need to claim them as exempt. However, you still must disclose your interest in these accounts on your bankruptcy schedules, and for clarity, many attorneys choose to list them as exempt property as well.

These accounts include:

• educational Individual Retirement Accounts (IRA) under IRC 530(1)(b), subject to certain limitations
• pension and retirement plans qualified under the Employee Retirement Income Security Act of 1974 (ERISA)
• government retirement plans under IRC 414(d)
• deferred compensation plans under IRC 567, and
• tax-deferred annuity plans under IRC 403(b).

(Find out more about commonly protected plans by reading Your Retirement Plan in Bankruptcy.)

Retirement Plans You Can Protect With a Bankruptcy Exemption

When you file for bankruptcy, you're allowed to keep a certain amount of property that you'll need to work and live, such as some equity in a home and car, household goods, and clothing. Your state decides whether you can use the state exemptions (the laws that tell you which property you can protect) or the federal exemptions.

Some exemption schemes allow you to exempt other types of retirement accounts. If a retirement plan is exempt under the exemption system you choose to use, you get to keep it. Fortunately, most plans will qualify for an exemption under both state and federal exemptions.

Electing State Exemptions

Many states provide exemptions for pensions and other retirement plans, including special protections for state employee retirement plans. You'll need to check the law in your state for those details.

But even when you claim state exemptions, you'll be entitled to keep any pension or retirement plan that's excluded from the bankruptcy estate automatically (see above). Also, filers who elect to use state exemptions can use the federal nonbankruptcy exemptions. The federal nonbankruptcy exemptions provide additional retirement protections.

Electing Federal Exemptions

If you use the federal exemptions, you'll be entitled to claim an exemption for any right to receive payments under any stock bonus, pension, profit sharing, annuity or similar plan or contract on account of illness, disability, age, or length of service to the extent reasonably necessary for your support or the support of your dependents. Limitations might apply if you were employed by someone close to you, such as a relative, when the employer created the plan.

(To learn more about how exemptions work, see Bankruptcy Exemptions.)

Retirement Plans That Might Not Be Protected

Not all plans are safe in bankruptcy. Plans that might not qualify for an exemption include:

• Employee Stock Purchase Plans (ESPP)
• improperly funded plans
• plans that don't qualify as a retirement plan under the tax code (or aren't compliant)
• an IRA inherited by someone other than a spouse (this will depend on the case law in your area), and
• plan funds that have been rolled-over or transferred into a new, noncompliant fund.

Consult With a Bankruptcy Lawyer

For many, a retirement account is the most significant asset a filer owns. Before pursuing bankruptcy, it's prudent to verify that you won't lose valuable property by consulting with a local bankruptcy attorney.