If you have a 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 is determined by the law in 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.
Certain retirement sources are completely outside bankruptcy law, regardless of where you live. Bankruptcy law states that they are not part of the bankruptcy estate, so there is no need to declare them exempt - the bankruptcy trustee cannot even touch them. These protected retirement sources are pensions and retirement funds at least partially funded by the employer:
Your plan administrator, your HR department's retirement advisor, or your accountant can help you determine the type of plan you have and whether it is completely safe from creditors and the bankruptcy trustee.
To learn more about 401(k)s 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.
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 or under the exemption laws of some states.
If your retirement account is a stock bonus plan, a non-ERISA qualified pension, a profit-sharing plan or an annuity, at a minimum, you can exempt whatever amount of the plan you reasonably need to support yourself and your dependents. To use this exemption, you might 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. Any portion of the pension you use for non-reasonable or non-necessary expenses, such as expenses for luxury items or services, could be non-exempt.
Whether a pension is exempt might also depend on the source of the funds you used to set it up. Individuals set up and fund annuities to provide a steady income in their later years. Many annuities are set up to provide a vehicle for paying out personal injury awards or lottery winnings. State laws restrict the exemptions that are available for some accounts, including annuities, to prevent the debtor from using them as vehicles for hiding assets.
While most people will be able to cover the entire balance of their pensions with an exemption provided by federal law, the federal exemption does have a dollar limit for traditional and Roth IRAs. You can protect up to $1,512,350 for all traditional and Roth IRAs combined if you file a bankruptcy case between April 1, 2022, and March 31, 2025. The cap is adjusted every three years for inflation and will change again on April 1, 2025.
Some pensions cannot be exempted under Federal law. They are fair game for the bankruptcy trustee. Non-exempt pensions include:
However, even if you have a pension that you cannot protect under a specific federal law, you might be able to use a wildcard exemption or a general personal property exemption, if available under bankruptcy law or state law, to protect at least some of it.
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