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 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).
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 How the funds get treated after being withdrawn is different (more below).
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:
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).
For IRAs and Roth IRAs, the exemption from creditors (the amount the bankruptcy court cannot touch) is limited to $1,362,800 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 $1,362,800 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 the cost of living increases. The most recent adjustment occurred on April 1, 2019. The limit will adjust again in 2022. (11 U.S.C. § 522(n).)
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.
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: April 2, 2019