You’ve been faithfully saving for your retirement and you have built a nice nest egg. But now, you’re going through hard times, you’re overwhelmed by debt, and you’re seriously considering filing Chapter 7 or Chapter 13 bankruptcy.
If you file for bankruptcy, what will happen to your pension plan, 401(k) or IRA? Does bankruptcy protect your retirement accounts from creditors’ claims, or is that money used to pay off your debt?
This is a very good question, and we have good news for you. If you decide to file Chapter 7 or 13, your retirement assets, including a pension, are protected, with a few minor exceptions.
Retirement Assets Are Protected Property
In 2005, congress overhauled the bankruptcy laws. Some recall that the changes tightened the guidelines for filing a Chapter 7 bankruptcy, but at the same time, the new law made it so the majority of retirement accounts and pensions are exempt from creditors’ claims.
In other words, if you file for Chapter 7 bankruptcy, your retirement accounts and pensions likely won’t be touched by creditors. If you file a Chapter 13, since your retirement accounts are exempt, they won’t have a bearing on how much or how little you pay back to creditors.
Generally, the exemption amounts are unlimited, with a few exceptions. Usually, the money sitting in a debtor’s retirement accounts will be untouchable. The plans that are protected by bankruptcy are ERISA-qualified pensions, including:
- 401(k) plans
- 403(b) plans
- IRAs, including Roth, SIMPLE, and SEP
- Money purchase, profit-sharing and defined-benefit plans
What are the limited exceptions?
The protections are rather generous, however, there is a limit that applies to traditional and Roth IRAs. For these, the exemption amount that is not subject to creditors’ claims is $1,245,475 per a person. This exemption applies to the total combined amount of all of a person’s retirement plans.
So, one person cannot exempt $1,245,475 for each of their plans. If you have more than that amount, the bankruptcy court will take the excess and use it to repay the debtor’s creditors. Also, that dollar figure is adjusted every three years to account for the increase in the cost of living.
If you are receiving benefits as income, then those are not exempt. If you file Chapter 7, the bankruptcy court will not take your benefits that you need to support yourself, however, it can take the amount that exceeds what you need for support to pay back creditors.
Conversely, if you file a Chapter 13, your retirement income will be factored in when determining how much of your unsecured debts you will have to pay in your repayment plan.