Under most circumstances, you can keep your retirement accounts, such as 401ks and IRAs, if you file for Chapter 7 bankruptcy. However, federal law caps the protected amount for some accounts. And, in a few situations, your retirement accounts might not be safe from the claims of the bankruptcy trustee and your creditors.
The type of protection the law provides for your retirement account depends on whether it's an ERISA (Employment Retirement Income Security Act) qualified plan or a non-ERISA plan.
If you're unsure which type is provided through work, check with your employer.
You don't need to worry about ERISA-qualified accounts in bankruptcy. The United States Supreme Court ruled that an ERISA-qualified retirement plan isn't property that's included in bankruptcy and can't be taken from you by the bankruptcy trustee appointed to your case. Examples of ERISA-qualified retirement plans include:
Another major advantage of these plans is that they're protected up to an unlimited amount. You don't have to worry about losing any of these assets to your creditors.
Bankruptcy Tip: It isn't unusual for someone to try to avoid bankruptcy by using retirement funds, only to file for bankruptcy later. Because you won't lose this type of retirement account in bankruptcy, it's rarely a good idea to dip into one to pay for debt that can be discharged (eliminated) in bankruptcy. Consider doing so only as a last resort. Emerging from bankruptcy with your retirement in place will help you make the most of your fresh start.
Federal bankruptcy law also protects non-ERISA retirement accounts. Non-ERISA plans include:
Unlike ERISA plans, the protection for traditional and Roth IRAs is capped at $1,512,350 for cases filed between April 1, 2022, and March 31, 2025. If you have more than one traditional or Roth IRA, you can only protect $1,512,3500 combined (not per account). The bankruptcy trustee will be able to take any amount over $1,512,350 to repay creditors. The cap is adjusted every three years for inflation and will adjust again on April 1, 2025.
The retirement exemptions are part of the federal bankruptcy exemptions. Even though some states don't allow filers to use the federal bankruptcy exemptions, federal law excludes ERISA-qualified retirement plans from bankruptcy, thereby protecting these accounts for all filers Chapter 7 and Chapter 13 bankruptcy filers.
For all other property, it's important to know whether the federal or state exemptions will apply or if you can choose between the two systems. Find out more about protecting property with bankruptcy exemptions.
Although ERISA-qualified retirement accounts are generally safe from your creditors when filing for bankruptcy, a few exceptions exist.
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 20, 2022