In most cases, when you file a Chapter 7 or 13 bankruptcy petition, you get to keep (exempt) your pension and retirement plan funds (with very few limitations).
You Can Keep (Exempt) Most Retirement Accounts in Bankruptcy
Contrary to stories you may have heard around the water cooler, you don’t lose everything you own when filing for bankruptcy relief. You can use bankruptcy exemptions to protect property you need to work and live, such as some equity in a home, a very modest car, and household belongings. With a combination of state (even though Utah has notoriously stingy exemption values) and federal law, you can also protect your retirement accounts.
Congress performed a comprehensive overhaul of the Bankruptcy Code in 2005. Now, virtually all ERISA-qualified retirement accounts and pension plan funds are exempt from creditors (with some exceptions).
In this context, a retirement account refers to funds on deposit in the actual account when your case is filed. How the funds get treated after being withdrawn is different (more below).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:
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, in Utah, there is no protection for regular funds on deposit in checking, savings and investment account funds. You’ll lose unprotected funds in both Chapter 7 and Chapter 13 bankruptcy (the money will be used to pay creditors) without thorough pre-filing planning to avoid such an unnecessary loss.
Traditional and Roth IRA Limitations
For IRAs and Roth IRAs, the exemption from creditors (the amount your bankruptcy trustee cannot reach) 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 your bankruptcy trustee to pay back your creditors.
This amount adjusts every three and the limit will adjust again in 2022. 11 U.S.C. § 522(n).
Withdrawn Retirement Benefits Aren’t Exempt
Although the funds sitting in your retirement accounts are exempt from creditors (and your bankruptcy trustee acting on behalf of creditors), retirement benefits paid to you as income aren’t exempt.
Here’s how this would work in Chapter 7 and Chapter 13:
Finding out what will happen to your retirement funds in bankruptcy is important before you file. It’s prudent to protect your interests by scheduling a meeting with me to discuss your options and map out a filing strategy.