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What Happens to Retirement Benefits in Bankruptcy

Protecting Your Retirement in Bankruptcy

Mature couple walking down dirt roadMost forms of retirement are protected when you file under any Chapter of bankruptcy. There are a few exceptions to this, so make sure that whatever kind of retirement you have is protected from your creditors.

If in fact all of your retirement funds are protected, that means that if you file a Chapter 7 “straight bankruptcy” case the Chapter 7 trustee will have no right to take any of it to pay your creditors. And if you file a Chapter 13 “adjustment of debts” case, the value of your retirement funds will have no effect on how much you have to pay to your creditors.

What’s Protected

Virtually all forms of retirement are protected. And the amounts protected are unlimited except in certain specific situations.

All forms of retirement covered by ERISA (Employee Retirement Income Security Act)—the very broad federal law governing pensions and retirement funds—are protected. These include:

  • 401(k)s
  • 403(b)s
  • IRAs (Roth, SEP, and SIMPLE)
  • Keoghs
  • profit-sharing plans
  • money purchase plans
  • defined-benefit plans

There are other forms of retirement funds which are recognized by the Internal Revenue Service and so are also protected in bankruptcy, including:

  • stock bonus and employee stock ownership plans under 401 of the Internal Revenue Code (IRC)
  • qualified annuity plans under IRC 403
  • church, partnership, proprietorship and government retirement plans under IRC 414
  • deferred compensation plans under IRC 457
  • retirement plans by tax-exempt organizations under IRC 501(a)

What’s NOT Protected

Considering this long list of forms of protected retirement, what isn’t protected?

In case it isn’t obvious, money that you simply have in the bank or hidden away that you have set aside for your retirement is not protected.

More broadly, funds that are more formally designated to be for retirement but still don’t meet the legal requirements may not be protected. Examples include funds that do not qualify as a retirement plan under any of the provisions of the Internal Revenue Code, or that were set up appropriately but no longer qualify because they weren’t funded properly. These problems tend to be with those set up by an individual or small business without the appropriate expertise or the money to pay for the needed expertise.

Retirement plans can also lose their protection if they are transferred, either by rollover into a non-eligible form of retirement, or sometimes by inheritance.

Retirement with Dollar Limitations

As mentioned above, there is usually no dollar limitation on protected retirement plans. One exception, although one that will not likely be relevant to most of our clients, under Section 522(n) of the Bankruptcy Code the funds protected in both a traditional and Roth Individual Retirement Account (IRA) is limited to $1,245,475 per person. (This amount is adjusted every three years to account for cost of living increases, most recently on April 1, 2013.)


Again, most retirement funds are protected in bankruptcy, and should give you no cause for worry. But you should have your attorney verify that your retirement is of the form that is indeed safe.

If you are in New Jersey, the Law Office of Andrew B. Finberg can help. The initial consultation is free. Please call us at (856) 208-4152. Or you can use this form to set up your no-obligation consultation with us. Let us review your situation personally so that you get the reassurance you need. We look forward to helping you get a fresh financial start without worries.

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