Is Your Pension and 401(k) Exempt in Bankruptcy?

Yes, in most cases, you can keep your pension if you file for Chapter 7 bankruptcy. Many retirement plans, including most 401(k)s and other employer-sponsored plans, are fully off-limits to the bankruptcy trustee no matter where you live. Others, like some annuities and non-ERISA pensions, are only partially protected, and the amount you can exempt depends on your state's law and the type of plan you have. A small category of plans isn't protected at all. Below, we break down which pensions fall into each group so you can find out where yours stands.

Which Pensions Are Fully Protected in Bankruptcy?

Pensions and retirement funds that are at least partially funded by your employer are fully protected—the trustee can't touch them regardless of your state's exemption laws. Bankruptcy law treats these plans as never becoming part of the bankruptcy estate in the first place, so you don't even need to claim an exemption to keep them. (11 U.S.C. § 541(c)(2).)

The fully protected retirement sources include:

• pensions or retirement funds that qualify under ERISA, such as most employer-sponsored plans, including 401(k)s, 403(b)s, and defined-benefit pension plans
• certain government (public) retirement plans that carry their own statutory anti-alienation protections, like the Federal Employees Retirement System or the Civil Service Retirement System, and many state retirement systems, and
• deferred compensation plans, such as a plan offered by an employer to a select group of employees that defers part of their compensation until they retire.

Note. Traditional and Roth IRAs (funded under Internal Revenue Code § 408 or § 408A) aren’t included in this list. Unlike ERISA-qualified plans, IRAs don’t qualify for exclusion from the bankruptcy estate under 11 U.S.C. § 541(c)(2) because they aren’t held in a trust with an ERISA-style anti-alienation restriction. Instead, IRA funds become part of the bankruptcy estate and must be protected using a separate exemption with a capped limit, discussed below. (11 U.S.C. § 522(b)(3)(C), (d)(12), (n).)

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's completely safe from creditors and the bankruptcy trustee. To learn more about 401(k)s and other accounts that aren't part of your bankruptcy estate, see the articles in What Happens to Bank Accounts, Retirement Accounts & Pensions in Bankruptcy.

Which Pensions Are Partially Protected in Bankruptcy?

If your pension doesn't fall into one of the fully protected categories above, it becomes part of the bankruptcy estate, but you can usually still exempt it in full or in part under federal bankruptcy exemption law or under the exemption laws of some states. (11 U.S.C. § 522.)

Stock Bonus Plans, Non-ERISA Pensions, Profit-Sharing Plans, and Annuities

At a minimum, you can exempt whatever amount of one of these plans 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 you and your dependents' expenses, such as housing, food, medical care, utilities, and transportation. Any portion of the pension you'd use for non-reasonable or non-necessary expenses, such as 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, and many annuities are set up to pay out personal injury awards or lottery winnings. State laws restrict the exemptions available for some accounts, including annuities, to prevent debtors from using them to hide assets.

Traditional and Roth IRAs

Most people can cover the entire balance of their pensions with an exemption provided by federal law, but the federal exemption does cap the amount you can protect in traditional and Roth IRAs combined. If you file a bankruptcy case between April 1, 2025, and March 31, 2028, you can protect up to $1,711,975 in IRA funds. (11 U.S.C. § 522(n); cap is adjusted for inflation every three years, with the next change due April 1, 2028.)

Pensions Not Exempt Under Federal Law

A small group of plans can't be exempted under federal law, so they're fair game for the bankruptcy trustee. Non-exempt pensions include:

• improperly funded plans
• plans that the U.S. Tax Code doesn't recognize as retirement plans
• employee stock purchase plans
• inherited IRA plans, unless you inherited the plan from your spouse
• plans that aren't compliant with the U.S. Tax Code, and
• plans funded by a rollover from a previous fund, when the rollover didn't comply with the U.S. Tax Code.

Consulting With a Bankruptcy Lawyer

Because pension exemptions turn on the type of plan and your state's rules, it's worth confirming your plan's status with your administrator before you file. Even if you have a pension that you can't protect under a specific federal law, you might still be able to use a wildcard exemption or a general personal property exemption, if your state offers one, to protect at least some of it. A bankruptcy lawyer can help you ensure that you protect all of your valuable assets.

To dig deeper into what else you can protect, read Can You Keep Your Retirement Accounts in Bankruptcy? for more on IRAs.