Addressing Special Asset Issues:
Protecting Your Retirement in Bankruptcy
Most forms of retirement are protected when you file under any Chapter of bankruptcy. There are a few exceptions to this, so you want to make sure that whatever retirement you have is protected.
If in fact all of your retirement funds are protected, that means that if you file “straight bankruptcy” case all of your retirement will be kept intact—the Chapter 7 trustee will have no right to take any of it to pay your creditors. And if you file “adjustment of debts” case, the value of your retirement funds will have no effect on how much you have to pay your creditors.
Virtually all forms of retirement are protected, AND the amounts protected are unlimited except in certain specific situations.
All forms of retirement covered by ERISA—the very broad federal law governing pensions and retirement funds (the Employee Retirement Income Security Act)—are protected. These include:
- IRAs (Roth, SEP, and SIMPLE)
- profit-sharing plans
- money purchase plans
- defined-benefit plans
There are other forms of retirement funds which are recognized by the Internal Revenue Service and are thus also protected in bankruptcy, including:
- stock bonus and employee stock ownership plans under 401 of the Internal Revenue Code (IRC)
- qualified annuity plans under IRC 403
- church, partnership, proprietorship and government retirement plans under IRC 414
- deferred compensation plans under IRC 457
- retirement plans by tax-exempt organizations under IRC 501(a)
What’s NOT Protected
With such a long list of forms of protected retirement, what isn’t protected?
As an extreme example, money that you have in the bank or under your mattress that you have designated as money set aside for your retirement is not protected.
More broadly, funds that are more formally designated to be for retirement but still did not meet the legal requirements may well not be protected. Examples are plans that do not qualify as a retirement plan under any of the provisions of the IRC, or that were set up appropriately but no longer qualify because they weren’t funded properly. The problems tend to be with those set up by an individual or small business without the appropriate expertise or the funds to pay for that expertise.
Retirement plans can also lose their protection if they are transferred, either by rollover into a non-eligible form of retirement, or in some cases by inheritance.
Retirement with Dollar Limitations
Although admittedly the following will not be relevant to most of our readers, under Section 522(n) of the Bankruptcy Code the funds protected in both a traditional and Roth Individual Retirement Account (IRA) is limited to $1,245,475 per person. (This amount is adjusted every three years to account for cost of living increases, most recently on April 1, 2013.)
Again, most retirement funds are protected in bankruptcy, and should give you no cause for worry. But that is after you receive assurance from a highly experienced bankruptcy attorney that your retirement is of the form that is indeed safe.