Whether you file for Chapter 7 or Chapter 13 bankruptcy, the rules regarding retirement accounts are the same. For Chapter 7, with only a few exceptions, the funds in your retirement accounts that were established under the Employee Retirement Income Security Act (ERISA) are exempt from bankruptcy and you can keep all the funds. In Chapter 13, the accounts are exempt and therefore not used to calculate the payment you will be required to make to your creditors under the reorganization plan.
ERISA accounts are ones that were established by your employer and meet certain IRS requirements. Other retirement accounts are safe but have a cap on how much money is exempt. This means the Chapter 7 trustee may take the non-exempt amount and in Chapter 13, the non-exempt amount will be used to calculate your repayment amount..
ERISA qualified accounts
The following retirement accounts are ERISA qualified and cannot be taken by the trustee no matter how much money is in the account.
- 401(k) plans
- Profit sharing plans or 403(b) plans
- Deferred compensation plans or 457(b)
- All government retirement plans
- Any tax exempt organizational retirement plans
- Defined benefit plans
Plans not ERISA qualified
These accounts are protected, but only up to a certain amount of money. The exempt amount is adjusted every three years. In 2010, it was $1,245,475. The bankruptcy court has the authority to allow you to keep more than the cap if it determines that it is in the interest of justice. These retirement plans include:
- Roth IRAs
- Traditional IRAs
Actions that convert exempt retirement accounts to non-exempt funds
- Do not withdraw money from your retirement accounts. As soon as you do this, the money is no longer exempt and the trustee may take the funds.
- When retirement benefits are paid out to you, the payment becomes income and is no longer exempt. The Chapter 7 bankruptcy trustee will not take what you need for you necessary living expenses, but may take any amount in excess of that. For Chapter 13, the benefit amount will be included when determining the amount of your repayment for your unsecured debt.
A bankruptcy attorney will review your accounts with you prior to filing for Chapter 7 or Chapter 13 bankruptcy so you will know exactly which ones are exempt and if there are any exceptions that might put your accounts in jeopardy.