Is Your Pension Exempt in Bankruptcy?

Find out if your pension is safe in Chapter 7 bankruptcy.

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If you have a pension and you file for Chapter 7 bankruptcy, you can probably exempt at least some of your pension and protect it from the bankruptcy trustee. The amount you can exempt depends upon the state in which you live, but it also depends upon the type of pension plan you have. Not all pension plans are created equal; federal law protects some retirement plans in full, while other plans are partially exempt and others still are not exempt at all.

(To learn more about exemptions and how they work, see the articles in Bankruptcy Exemptions.)

Fully Exempt Pensions

Certain pensions are completely exempt under bankruptcy law, regardless of where you live. Bankruptcy law states that these types of pensions are not part of the bankruptcy estate, so there is no need to declare them exempt - the bankruptcy trustee generally cannot touch them. These include:

  • any retirement funds that are tax exempt under the U.S. Tax Code, such as 401, 403 or 408 plans
  • any pension or retirement funds that qualify under ERISA
  • certain government retirement plans
  • deferred compensation plans
  • any retirement plan provided to a "controlled group" such as churches, partnerships, proprietorships or governments, and
  • any retirement plan established and maintained by a tax-exempt organization
To learn more about 401ks and other accounts that are not part of your bankruptcy estate, see the articles in What Happens to Bank Accounts, Retirement Accounts & Pensions in Bankruptcy.

Partially Exempt Pensions

If your pension does not fall under any of the above categories, it does become part of the bankruptcy estate; however, you may still be able to exempt it in full or in part under federal bankruptcy exemption law. If your retirement account is a stock bonus plan, a pension, a profit sharing plan or an annuity, you can exempt whatever amount of the plan you reasonably need to support yourself and your dependents. To use this exemption, you may have to prove to the trustee that you need the funds to pay for your and your dependents' expenses, such as housing, food, medical care, utilities and transportation. You may also have to prove that the expenses you're paying are reasonable and necessary for your and your dependents' support. Any portion of the pension you may use for non-reasonable or non-necessary expenses, such as expenses for luxury items or services, may be non-exempt. This exemption is not available to all debtors, however. If you worked for a relative or another person close to you and that person started and funded the pension plan, you cannot use this exemption if you are receiving the funds because you retired due to age or length of service.

Non-Exempt Pensions

Some pensions cannot be exempted. Non-exempt pensions may include:

  • improperly funded plans
  • plans that the U.S. Tax Code does not recognize as retirement plans
  • Employee Stock Purchase Plans
  • inherited IRA plans, unless you inherited the plan from your spouse
  • plans that are not compliant with the U.S. Tax Code, and
  • plans funded by a rollover from a previous fund when the rollover did not comply with the U.S. Tax Code.

However, even if you have a pension you cannot exempt with a specific exemption, you may be able to use a wildcard exemption or a general personal property exemption to protect at least some of the pension.

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