Your Retirement Savings in Bankruptcy

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).

  • Chapter 7 bankruptcy. Even though some property may be at risk (but we work together to protect as much value as possible), your retirement funds are safe because those funds have been specifically protected by Congress and Utah state exemption law.
  • 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.

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 How the funds get treated after being withdrawn is different (more below).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:

  • 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, 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:

  • 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 calculation. 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 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.

Working with Marji was such a pleasure at such a difficult time. … I would highly recommend Marji Hanson.
– Veloy R.

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About Marji Hanson

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My law practice focuses exclusively on consumer bankruptcy law. I can help you decide if bankruptcy will solve your problems and which program, Chapter 7 or Chapter 13, is best suited to meet your financial needs. I have learned about the bankruptcy system in the District of Utah from the inside out.

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