In general, retirement savings are protected in bankruptcy, but the specific protection depends on the type of retirement accounts you have and the type of bankruptcy you file for. If you have a 401(k), 403(b), or similar employer-sponsored retirement plan, those funds are protected from creditors in bankruptcy. This protection is under the Employee Retirement Income Security Act, also known as ERISA, and your 401(k) is generally shielded, even if you file for Chapter 7 or Chapter 13 bankruptcy.
Further, your IRA is typically protected up to $1.5 million. Like 401(k)s, pension plans that are governed by ERISA are generally protected from creditors in bankruptcy.
One exception to a retirement account being exempt is a fraudulent conveyance. If you transferred large sums of money into retirement accounts shortly before filing for bankruptcy, a trustee may investigate if the transfers were made to avoid paying creditors. If the transfer is deemed fraudulent, those funds could potentially be clawed back and used to pay creditors.
In a Chapter 7 bankruptcy, most of your assets are liquidated to pay off your debts. Retirement accounts like a 401(k) or IRA are usually exempt, meaning they are not used to pay creditors. In a Chapter 13 bankruptcy, you enter a repayment plan to pay off some or all of your debts over time. Your retirement savings are generally not part of the repayment plan.
The bottom line is in most cases, you will not lose your retirement savings if you file for bankruptcy, particularly if you have retirement accounts that are protected under ERISA or other federal or state laws. However, it’s always important to review your specific situation with a bankruptcy attorney who can give you advice based on the Pennsylvania and bankruptcy laws and the specific details of your case.
If you have any questions about the topic discussed in this article, or any bankruptcy law matter, please give us a call at Bononi & Company 724-832-2499.