Retirement plans are one of the few assets that are mostly or completely exempt from the bankruptcy estate. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 protects most types of retirement accounts. If you have a 401k, 457(b), 403(b) or any other ERISA-qualified plan, then your retirement funds are exempt. Government retirement plans and pensions may also be completely protected during bankruptcy.
During a Chapter 7 bankruptcy, retirement funds are not used to pay off your creditors. In a Chapter 13 bankruptcy, your retirement funds are not part of the three to five-year repayment plan. These funds do not factor into how much you pay back creditors during your Chapter 13 bankruptcy.
However, there are exceptions. With traditional and Roth IRAs, only a portion of the retirement funds are excluded from the bankruptcy estate. As of 2016, this amount is $1,283,025. The amount exempt from bankruptcy changes every three years. SIMPLE and SEP IRAs are not affected by the cap.
Other retirement plans, such as an Education Savings Account (529 Plan), may be fair game for creditors. It would depend on the circumstances. If you have an Education Savings Account, then it is possible you could lose some of those funds during bankruptcy.
There are other catches. Only the funds in your retirement account are exempt from the bankruptcy estate. If you are currently receiving payments from your retirement, then those funds will not be protected.
Should I Liquidate a Retirement Account to Avoid Bankruptcy?
Many people can file for bankruptcy without having to worry about the health of their retirement accounts. It is a common mistake (and a very costly one) to liquidate a retirement account to pay back creditors. People who are afraid they will lose their assets in bankruptcy sometimes resort to desperate measures. However, options like Chapter 13 bankruptcy could protect your assets while also saving your retirement account.
The New Jersey bankruptcy attorneys at Garland & Mason, L.L.C can help explain your possible options for debt relief. Our attorneys can explain questions you may have about retirement funds and bankruptcy.