Can I Keep My Retirement Savings in Bankruptcy?

Automatic Stay in Bankruptcy

If you are like many in the US currently struggling with the burden of crushing debt, you might be considering bankruptcy as a way to get a fresh start. There are two forms of bankruptcy that are most common for individual filers as opposed to businesses, and either could be suitable for reaching your goals of debt relief. Chapter 7 bankruptcy discharges qualifying debts without having to repay creditors. Chapter 13 bankruptcy reorganizes your debt into an arrangement that enables you to repay some amounts to creditors. With both Chapter 7 and 13, you get the advantage of the automatic stay upon filing. Creditors must cease and desist with attempts to collect the debt.

Another similarity between the two types of individual bankruptcy is that your assets, income, expenses, and many other financial matters will be a focus. These factors could determine whether you qualify, but the US Bankruptcy Code also includes rules on what assets you can protect. Some items are considered part of the bankruptcy estate, so they could be converted into cash by the bankruptcy trustee and used to pay your creditors.

Therefore, a key question arises among potential bankruptcy filers about whether it is possible to shield retirement accounts from the bankruptcy trustee. When you have planned ahead for the time that you will leave the workforce, it is concerning to think that these funds could be part of the bankruptcy estate. Fortunately, you can keep retirement savings in many cases, and an Arizona bankruptcy attorney will explain how the laws work. Some background is also useful.

Basic Rules on Retirement in Bankruptcy

Retirement accounts come in many forms and are managed in different ways, from plans created by employers as an employment perk to self-funded assets that you contribute to with pre- or post-income tax dollars. When looking at whether retirement savings are protected under bankruptcy laws, there are two important statutes that work to your advantage:

  1. Employee Retirement Income Security Act (ERISA): ERISA was enacted in 1974 to protect the retirement assets of workers. There are many provisions to prevent fund administrators from misusing plan assets, and the statute also covers non-retirement perks such as employer-provided health care plans. However, one of the most crucial aspects of ERISA in the context of bankruptcy is that it protects all retirement accounts that fall under its umbrella.
  2. Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA): This statute protects various types of Individual Retirement Accounts (IRAs), including Traditional and Roth. With BAPCPA, there is a dollar value limit that you can shield, which is up to $1,512,350.

If your retirement fund is not protected by ERISA or BAPCPA, it may still be excluded from the bankruptcy estate and protected. The details depend on the type of account, value, exemptions, and many other considerations, including the bankruptcy chapter.

Retirement and Different Types of Bankruptcy in Arizona

The treatment of your retirement savings will vary based upon whether you file for Chapter 7 or 13, so it is helpful to get additional details on the differences between them.

  • Chapter 7 bankruptcy discharge eliminates debts if you qualify, but it is also called liquidation bankruptcy because some assets may be sold off and liquidated to pay creditors. However, because of the ERISA protections, qualifying retirement savings cannot be touched by the bankruptcy trustee.
  • With Chapter 13 debt repayment, you will propose a plan that aims to pay back some or all of what you owe to creditors over a period of years. There is no liquidation of assets as a source of funds to repay them, so you get to keep your retirement savings.

These are the default rules about how retirement is handled in bankruptcy, but there are additional considerations under the complicated bankruptcy laws. You might have other options to protect an account that might otherwise be part of the bankruptcy estate, while some retirement savings cannot be shielded.

Accounts Not Protected in Bankruptcy

ERISA-qualified plans include 401(k), 403(b) profit sharing, deferred compensation plans, and many other tax-exempt plans. Generally, an account that you contribute to via your employee benefits package will be protected. There are many other ways of planning for retirement, however, and many people save or invest through other options. Though you might be intending to use them to fund your retirement, the following retirement savings may not be protected from bankruptcy:

  • A basic savings account;
  • Certificates of deposit;
  • Employee stock purchase plans, which are different from a retirement package;
  • Other stock, securities, or investment accounts; and,
  • Any distributions, disbursements, or withdrawals you take from retirement plans, including funds you might take from an ERISA-qualified account.

How Bankruptcy Exemptions Work in Arizona

It is disheartening to learn that some assets will not be excluded from bankruptcy, including some retirement savings. Still, there is an additional layer of protection through bankruptcy exemptions. The theory behind these laws is that, after going through bankruptcy, a person needs to keep certain assets to be financially secure and productive. The point is to avoid a situation where you fall back into debt, and it is through exemptions that you can retain the resources to support yourself.

There are numerous exemptions under the US Bankruptcy Code, but states also have laws on the topic. It is essential to know the rules in your state to ensure you can properly apply and protect assets. For instance, in Arizona, you can only take advantage of exemptions recognized at the state level. Still, the laws allow you to protect some retirement savings that might not be covered by ERISA, including:

  • Funds in a bank account, up to a limit for individuals and married couples;
  • Retirement plans specifically designated by law; 
  • Pensions for police, firefighters, and other public safety personnel; and,
  • Some life insurance cash value.

Withdrawals from Retirement Accounts

When discussing whether you can keep retirement savings in bankruptcy, there is an important detail to keep in mind. You can only protect qualifying funds if they remain in the account as intended. When you make a withdrawal, the amounts become part of the bankruptcy estate. Instead of protecting them through ERISA or BAPCPA, they are now in your pocket and subject to the bankruptcy process.

Some people anticipating filing for bankruptcy do themselves a disservice through a common mistake: They are in financial dire straits with creditors constantly calling, so they take an early distribution from a protected account to make payments. Most plans impose significant penalties on doing so, and there can be adverse tax implications. Still, even beyond these penalties, going this route is a critical mistake because:

  • You are using funds to pay creditors, when these amounts would possibly qualify for protection under bankruptcy laws.
  • You are using the money to pay a debt that could have been discharged, so you would not have to pay the creditor anyway.

Benefits of Bankruptcy in Arizona

When you realize that you could keep some retirement savings even when you go through bankruptcy, you should also review some of the advantages. You eliminate debt with Chapter 7 bankruptcy, while you turn your debt into a plan you can afford with Chapter 13. There are also benefits that extend to those who file under either chapter, such as:

  • The automatic stay goes into effect as soon as you file. Creditors must cease all efforts to collect the debt, no matter what the status. They cannot make harassing phone calls, garnish wages, impose liens, or initiate a lawsuit.
  • Once the bankruptcy process concludes, you emerge debt-free through discharge or completion of your debt reorganization plan.
  • You will not continue to pay the fees and interest on past due accounts. For some debtors, paying the most they can afford will only cover these amounts. They are not even reducing the actual debt.
  • Bankruptcy laws require filers to go through counseling to better understand credit and establish a workable budget. These are tools and skills that will help you avoid falling back into debt.

As you are reviewing these and other benefits of bankruptcy, it is also important to remember the lingering effects. You are probably aware that going through the process will affect your credit score. A Chapter 7 case will remain on your record for 10 years, and a Chapter 13 bankruptcy is not removed for 7 years. Still, considering the advantages described above, bankruptcy may still be a wise decision.

Legal Help with Retirement Savings and Bankruptcy in Arizona

The US Bankruptcy Code, Arizona exemption laws, and the other legal details involved with bankruptcy are extremely complicated even when not evaluating retirement. When you need to consider ways to protect your plan and future, retaining legal representation should be a priority. An Arizona bankruptcy attorney will:

  • Consult with you about bankruptcy options; 
  • Review your assets and debts;
  • Determine opportunities to protect certain assets by law, exemption, or other strategies;
  • Advise you advantages of filing Chapter 7 versus Chapter 13, depending on eligibility;
  • Assist with preparing all bankruptcy forms and filing them in court;
  • Representing you before the bankruptcy court, including the meeting of creditors that is required for Chapter 13; and,
  • Any other tasks that are necessary to ensure you experience the benefits and protections of bankruptcy laws.

Set Up a Consultation with an Arizona Bankruptcy Lawyer

While it is reassuring to know that you can protect retirement savings in bankruptcy, you can see the complications with the process. If you have retirement accounts and want to know more about whether they would be included in the bankruptcy estate, please contact DebtBusters. You can reach our firm by calling (866) 223-4395 or visiting us online. We are happy to schedule a consultation with a skilled bankruptcy attorney at our offices in Scottsdale, AZ.

Related Content: Do Judgements Go Away With Bankruptcy?