Your Retirement Plan in Bankruptcy

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

In most cases, when you file for Chapter 7 or 13 bankruptcy, you get to keep your pension and retirement plan funds. But a few limitations exist. Learn about these essential rules if you’re considering bankruptcy.

(You can start with bankruptcy basics by reading A Chapter 7 Bankruptcy Overview and An Overview of Chapter 13 Bankruptcy.)

You Can Keep (Exempt) Most Retirement Accounts

You don’t lose everything you own when filing bankruptcy. You can use bankruptcy exemptions to protect property you need to work and live, such as some equity in a home, a modest car, and household belongings.

When it comes to your retirement accounts, Congress overhauled the bankruptcy laws in 2005. Now, virtually all ERISA-qualified retirement accounts and pension plan funds are exempt from creditors (however, there are some exceptions).

  • Chapter 7 bankruptcy. Even though you give up property in this chapter, your retirement funds are safe because they’re protected by Congress and possibly another exemption (every state has a set of state exemptions).
  • Chapter 13 bankruptcy. Because your retirement accounts are exempt, the balance won't affect how much you must repay creditors in your three- to five-year Chapter 13 repayment plan. (Learn more in Keeping Property in Chapter 13 Bankruptcy.)

In this context, a retirement account refers to funds in the actual account. How the funds get treated after being withdrawn is different (more below).

Fully-Protected Retirement Accounts

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 ERISA-qualified pension plans, such as:

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

Keep in mind that general savings accounts, investment accounts, and stock option plans won’t be protected if it isn’t an Erisa-qualified plan—and many are not.

Also, few states have exemptions that protect bank and investment account funds. Even when they do, the coverage is minimal (for instance, $300 isn’t uncommon). You’ll lose unprotected funds in both Chapter 7 and Chapter 13 bankruptcy (the money will be used to pay creditors).

Traditional and Roth IRA Limitations

For IRAs and Roth IRAs, the exemption from creditors (the amount the bankruptcy court cannot touch) is limited to $1,283,025 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 $1,283,025 for each plan), the excess can be taken by the bankruptcy court to pay back your creditors.

This amount adjusts every three years to account for cost of living increases. It will adjust again in 2019.

Withdrawn Retirement Benefits Aren’t Exempt

Although the funds in your retirement accounts are exempt from creditors (subject to the limitations discussed above), retirement benefits paid to you as income aren’t exempt.

Here’s how this works.

  • Chapter 7 bankruptcy. If you receive a monthly payment from a pension or retirement account, the court will consider it income that gets figured into your Chapter 7 means test qualification. 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 and use it to repay your creditors.
  • Chapter 13 bankruptcy. In this chapter, retirement income will help determine what portion of your unsecured debts you must repay in your Chapter 13 repayment plan.

Finding out what will happen to your retirement funds in bankruptcy is important. In fact, many people who are at the stage of life that they’re withdrawing retirement funds are judgment proof and don’t need to file for bankruptcy. It’s prudent to protect your interests by meeting with a qualified bankruptcy lawyer.

Updated: June 19, 2018

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