When you've made sacrifices by putting away money for retirement, you don't want to worry that you'll lose it if you have to file for bankruptcy. Learn about the protections afforded to 401(k) and ERISA-qualified retirement accounts, including:
Also, it's a good idea to learn how bankruptcy works and other things you should know about bankruptcy. And don't forget to try out our quick ten-question bankruptcy quiz—it can help you spot potential bankruptcy issues fast.
The purpose of bankruptcy law is to help get filers back on their feet financially, not to make life more difficult. So filers aren't stripped of all belongings. Filers keep the things needed to maintain a home and employment.
But that's not all. Filers can also keep most tax-exempt retirement accounts, including 401(k)s, 403(b)s, profit-sharing and money purchase plans, IRAs, and defined-benefit plans. However, traditional and Roth IRA protection is capped at a combined total of $1,512,350 (for cases filed between April 1, 2022, and March 31, 2025. These protections apply in both Chapters 7 and 13.
The benefit of this protection is that you can file for bankruptcy without jeopardizing your nest egg. To maximize the assets you'll have after bankruptcy, avoid doing these things before you file:
Federal law actually excludes ERISA-qualified retirement accounts from bankruptcy. You'll need to protect your remaining property with federal or state exemptions.
Your state decides whether you must use state bankruptcy exemptions. Some states, but not all, let you use the federal bankruptcy exemptions instead of the state system if you'd be able to protect more property.
Keep in mind that many state exemption systems offer retirement protections in addition to the federal protections discussed above. Also, if you choose the state bankruptcy exemptions, you can use the federal nonbankruptcy exemptions, too, which is important because the federal nonbankruptcy exemptions cover a wide range of federal retirement programs.
This checklist can help with bankruptcy exemption planning.
Keep in mind that in Chapter 7, filers lose property not covered by an exemption. In Chapter 13, filers pay for nonexempt property in the Chapter 13 payment plan.
Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.
The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.
More Bankruptcy Information
We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.
Updated April 21, 2022