Under most circumstances, you can keep your retirement accounts, such as 401ks and IRAs, if you file for Chapter 7 bankruptcy. However, for some accounts, the protected amount may be capped. And in a few situations your retirement accounts may not be safe from the claims of the bankruptcy trustee and your creditors.
2005 Bankruptcy Law Overhaul Simplified Retirement Account Rules
In 2005, Congress enacted BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act), which in most cases made filing for bankruptcy more onerous and difficult for consumers. One exception to this rule is retirement accounts, where BAPCPA simplified some of the rules. It eliminated the differences among the states on how some retirement plans are treated, and in some instances, it increased the amount of retirement savings you could keep if you file for bankruptcy.
ERISA v. Non-ERISA Qualified Plans
What type of protection the law provides for your retirement account depends on whether it is an ERISA (Employment Retirement Income Security Act) qualified plan or non-ERISA plan.
ERISA-qualified plans. An ERISA plan is established by an employer, meets certain IRS guidelines, and is tax exempt.
Non-ERISA-qualified plans. The most common type of non- ERISA plans are IRAs (Individual Retirement Accounts). These plans are also included under BAPCPA’s umbrella of protection.
ERISA Qualified Retirement Plans
The United States Supreme Court ruled that ERISA qualified retirement plans are not property of the bankruptcy estate, and cannot be taken from you by the trustee. Examples of ERISA qualified retirement plans include:
- 403(b) or profit sharing plans
- 457(b) deferred compensation plans
- governmental plans, and
- tax exempt organizational retirement plans.
The major advantage is that these types of plans are protected up to an unlimited amount – you don’t have to worry about the trustee distributing any of these assets to your creditors.
Non-ERISA Qualified plans
Federal bankruptcy law also protects non-ERISA retirement accounts. Non-ERISA plans include:
- Roth IRA’s
- SEP-IRA’s (for small business owners)
- SIMPLE IRA’s (for self-employed individuals), and
- similar retirement plans.
Unlike ERISA plans, the protection for traditional and Roth IRAs is capped at $1,245,475. If you have more than one traditional or Roth IRA, you can only protect $1,171,650 combined (not per account). This means the bankruptcy trustee may be able to take any amount over $1,245,475 in order to repay your creditors. This cap is adjusted every three years for inflation, and was last adjusted in April 2010. Courts are re permitted to increase this cap where the “interests of justice so require.”
The new bankruptcy law, however, did give unlimited protection to SEP-IRAs and SIMPLE IRAs. That means that is you have a SEP-IRA or a SIMPLE IRA, the trustee cannot take any of it, regardless of its value or amount.
State vs. Federal Bankruptcy Exemptions
The retirement exemptions discussed above are found in the federal bankruptcy exemptions. States are permitted to "opt-in" (or use the federal bankruptcy exemptions) or “opt-out” (and use their own state exemptions). With respect to retirement funds, however, BAPCPA eliminated the differences among the states and made the opt-in and opt-out statutes identical. This was intended to afford equal treatment of exemption claims of retirement funds to all Chapter 7 and Chapter 13 bankruptcy filers. Therefore, whether you live in an opt-in state or an opt-out state, the federal retirement bankruptcy exemptions are applicable to your bankruptcy case. For all other exemptions (other than retirement funds), it is important to know if you live in an opt-in or opt-out state to determine which exemptions apply to your bankruptcy case.
(To learn more, see our Bankruptcy Exemptions area.)
When Your Retirement Accounts May Not Be Protected
Although your retirement accounts are generally safe from your creditors when you file for bankruptcy, there are a few exceptions.
- If you withdraw money from a retirement plan, it is no longer protected.
- These rules only apply if you file for bankruptcy.
- If the IRS has filed a valid tax lien against you, it may be able to reach your retirement assets.
- Divorcing spouses may have access to your retirement accounts.
(To learn what happens to pensions in bankruptcy, see What Happens to Bank Accounts, Pensions, and Retirement Funds in Bankruptcy?)