Pension Protection in Bankruptcy

Many people save into company pension schemes with the intention of using it to pay for their retirement. However, what happens if they have other debts and decide to file for bankruptcy? The good news is that, in most cases, these funds are protected. Pensions are exempt from creditors under federal and state exemption laws, as long as they remain in the actual account. Whether or not you can keep your funds depends on the type of bankruptcy you choose and the rules that govern it. Connect with Cain & Herren bankruptcy attorney to learn more about how a bankruptcy affects your pension.

Pensions are typically shielded from creditors in a bankruptcy because the Employee Retirement Income Security Act (ERISA) requires that qualified plan assets be kept separate from general assets. The law also includes “spendthrift provisions” that prevent the alienation of those assets to pay creditors.

This protection applies to both traditional and Roth IRA accounts, as well as all types of employer-sponsored retirement plans, including defined benefit plans. But it only protects the overall value of your IRA or retirement plans up to a certain limit, which is adjusted annually for inflation. If you have more in your IRA or retirement plans than this amount, it can be subject to liquidation by the trustee to pay creditors.

In the event of a Chapter 7 bankruptcy, the trustee will only be able to take up to $1,515,350 of your total combined IRA and retirement account balances. This limit is not set by the federal government but by the rules of your IRA or retirement plan, and is adjusted regularly. You can find the exact number for your specific IRA or retirement plan by checking your summary plan description, a document that every employer must provide to their employees and retirees.

You can also safeguard your retirement savings by choosing a state with a higher dollar limit or by using a wildcard or cash exemption, available under federal and state bankruptcy law, to protect the full amount. If you have money left in your retirement accounts after the Chapter 7 or Chapter 13 liquidation process, it may be subject to seizure and auction by creditors.

If you are considering bankruptcy, it is important to seek expert debt advice before taking any steps. Our online debt advice tool can help you find the best solution for your debt problems.

In addition to ensuring that you can keep your retirement accounts, you may be able to keep other property that is essential for working and living, such as some equity in your home and vehicle. Generally, you can only keep this kind of property by using a wildcard or cash exemption or by applying to the bankruptcy court for a special allowance.

In the case of a Chapter 7 bankruptcy, you can use a wildcard or cash exemption to protect up to $23,025 in unused post-tax contributions to your 401(k) and other employer-sponsored retirement accounts, as long as you haven’t already withdrawn these funds. However, if you withdraw funds from these accounts, the exemption will no longer apply, and you could be forced to give up these assets as part of your bankruptcy settlement.

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