What Happens to Your Retirement Accounts When You File for Bankruptcy?

Close-up of a bankruptcy petition

If you file for either Chapter 13 or Chapter 7 bankruptcy, you could still keep your retirement accounts and pension plans — but they're subject to certain limits. According to federal bankruptcy statutes, when you file for Chapter 7, you could exempt almost all of your pension and retirement plans from your creditors. The same goes if you file for Chapter 13.

Limits on Exempt Retirement Plans

Give or take certain exceptions, the amount you could exempt are unlimited. This means that you could protect your entire retirement account. These retirement accounts include accounts considered ERISA-qualified, including 401(k)s, Keoghs, 403(b)s, IRAs such as Roth, SIMPLE, and SEP, money purchase accounts, defined benefit plans, and profit-sharing accounts. However, many renowned bankruptcy attorneys in West Valley City noted that this broad rule has limits regarding Roth and traditional IRAs.

For Roth IRAs and traditional IRAs, the amount you could exempt from creditors is capped at $1,283,025 — and this applies to all of your retirement funds. If all your retirement accounts are more than this amount, the court could get the excess and use it for repaying your creditors. This limit is modified every three years to take into account the inflation of living costs. 

Non-Exempt Retirement Plans

While creditors can’t touch the accounts mentioned, subject to the previously discussed limits, you can’t exempt any retirement benefit paid to you that's considered an income. With a Chapter 7, the court won’t take benefits that you need for supporting yourself, but could take any excess amounts to pay back your creditors. With a Chapter 13, your retirement income would be part of your repayment plan to help in determining how much of your unsecured debts you still need to pay off.

Moreover, any money you withdrew from your retirement account (that you used for buying assets or put into a bank account before you file for bankruptcy), won’t be exempted by the court. Bankruptcy exemptions won’t protect your retirement account if it’s found to be illegal or fraudulent in any way.