Retirement Funds and Bankruptcy



Retirement Funds and Bankruptcy

Filing for bankruptcy can be a difficult decision, especially when retirement is on the horizon. Many people worry about losing their retirement savings if they file for bankruptcy. The good news is that retirement accounts are generally well-protected in bankruptcy. This article will explain the basics of how retirement accounts are treated in bankruptcy, including details on 401(k)s, IRAs, pensions, and more. We’ll also discuss some common myths and mistakes to avoid.

401(k) Plans

401(k) plans receive strong protection in bankruptcy thanks to a federal law known as ERISA (the Employee Retirement Income Security Act). Under ERISA, 401(k) balances are shielded from creditors in bankruptcy. This means the court cannot force you to use your 401(k) funds to pay back debts in Chapter 7 or Chapter 13 bankruptcy.

There are a couple exceptions. If you took a loan from your 401(k), the unpaid balance may not be protected. The bankruptcy trustee could require you to repay the loan back into the 401(k). Also, contributions made in the year before bankruptcy may be at risk if they are considered “excessive” compared to your prior contributions.

But in most cases, your 401(k) will remain intact through bankruptcy. The U.S. Supreme Court has upheld the protection of ERISA-qualified plans like 401(k)s in bankruptcy [1].


IRAs receive similar protection to 401(k)s in bankruptcy. While not covered by ERISA, IRAs are shielded by bankruptcy exemptions enacted by Congress and most states. Federal bankruptcy exemptions protect up to $1,362,800 per person in IRA funds [2].

So in most cases, your entire IRA balance will be protected in Chapter 7 or Chapter 13 bankruptcy. Creditors cannot force you to cash out the IRA or seize the funds.

There are a couple risks to be aware of. If you took distributions from the IRA shortly before filing, the bankruptcy trustee may be able to “claw back” some of that money to pay creditors. Also, any inherited IRAs may only receive limited protection.


Pensions are treated very similarly to 401(k)s in bankruptcy. Most pensions are covered by ERISA and receive full protection. The bankruptcy court cannot force you to make early withdrawals or otherwise access the funds.

Government pensions, such as for federal employees, military members, and many state/local employees, receive protection through separate federal and state laws. The specifics vary, but in general government pensions are fully exempt in bankruptcy.


Annuities are less protected than 401(k)s, IRAs, and pensions in bankruptcy. Whether an annuity can be shielded depends on state law and the type of annuity.

Some states provide an unlimited exemption for annuities, fully protecting them. Others have a dollar limit, meaning annuities over that amount may not be fully protected. A few states provide no exemption at all [3].

It also depends whether the annuity is qualified or non-qualified. Qualified annuities receive stronger protection similar to 401(k)s and IRAs. Non-qualified annuities are riskier.

Social Security

Social Security benefits receive full protection in bankruptcy under federal law. Your Social Security income cannot be touched by creditors or the bankruptcy court [4].

This includes retirement benefits, disability benefits, survivor benefits, Supplemental Security Income (SSI), and any other payments from the Social Security Administration.

Common Bankruptcy Myths

There are some common myths to be aware of when it comes to retirement accounts in bankruptcy:

  • Myth: The bankruptcy trustee will take your retirement money. This is not true for 401(k)s, IRAs, pensions, and Social Security, which are fully exempt.
  • Myth: Creditors can seize your retirement accounts if you file bankruptcy. Creditors cannot take funds from exempt retirement accounts either before or after bankruptcy.
  • Myth: Bankruptcy eliminates all your debt so you need to cash out retirement. This is risky – preserved retirement funds can provide income after bankruptcy.

Avoid These Mistakes

When facing bankruptcy, people often make mistakes in handling retirement accounts. Avoid these common pitfalls:

  • Cashing out retirement funds prematurely – this may trigger taxes/penalties and lose bankruptcy protection.
  • Stopping 401(k) contributions before filing – continue contributing up to filing to maximize protection.
  • Using retirement money to pay creditors – bankruptcy wipes out most unsecured debt anyway.
  • Taking lump sum payout from pension – can lose protection compared to keeping monthly payments.

Strategies to Protect Retirement

If you are considering bankruptcy, be sure to take steps to protect your retirement funds:

  • Consult an attorney – laws vary by state and an attorney can help shield your retirement money.
  • Roll over 401(k) to IRA – IRAs receive unlimited federal protection.
  • Avoid retirement account loans/hardship withdrawals – protects balances and avoids taxes.
  • Keep contributing to 401(k) before filing – protects recent contributions from creditors.


The bankruptcy process can feel overwhelming. But in most cases, retirement accounts like 401(k)s, IRAs, and pensions receive strong protection in bankruptcy. With proper planning, you can ensure your retirement savings remain intact through the bankruptcy process. An experienced attorney can advise you on the best strategies based on your state’s laws.


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