Protecting Retirement Accounts During Bankruptcy
A family’s retirement fund represents years of hard work and sacrifice. When severe financial trouble plagues a household, losing the family nest egg is a serious concern. Fortunately, Congress has provided substantial protections in the bankruptcy laws that safeguard retirement accounts during financial crisis.
It is important to recognize that in a Chapter 13 bankruptcy assets (including retirement funds) are not taken from the debtor. Most Chapter 13 plans are funded from earned income, and retirement funds are used only with the voluntary consent of the debtor. During a Chapter 7 bankruptcy case retirement funds are generally safe as they are either exempt or not part of the bankruptcy estate.
Congress has declared that certain retirement funds are exempt from creditors during a Chapter 7 bankruptcy case. These funds include retirement accounts classified under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code. These sections cover most retirement plans and include pension plans, profit sharing plans, stock bonus plans, employee annuities, IRAs, Roth IRAs, government deferred compensation plans, plans of tax exempt organizations, and certain trusts. The laws exempt these funds to over a million dollars for each debtor.
The bankruptcy laws further protect retirement accounts by providing that retirement funds not otherwise exempt are protected if they are necessary for the support of the debtor and the debtor’s dependents. The bankruptcy laws also protect certain retirement accounts subject to title 1 of ERISA, 457 deferred compensation plans, 403(b) tax deferred annuities, and health insurance plans regulated by state law.
The federal bankruptcy laws provide many ways to protect your retirement accounts during bankruptcy. The key is to identify the type of account and the corresponding protection prior to filing the bankruptcy case. As always, consult with an experienced bankruptcy attorney prior to taking any action to either move retirement funds, make contributions, or take withdrawals as these actions may impair your attorney’s ability to protect your retirement account.