Retirement Accounts in Bankruptcy

A common question when someone is considering filing for bankruptcy protection is whether they can keep their retirement account through the process or if they would need to surrender the funds to the creditors. The good news is that in a majority of bankruptcy cases, retirement accounts are exempt from creditors, so you will not lose your retirement account in the bankruptcy.  It is important to point out that the retirement account exemption applies to funds while they are in a qualified retirement account. If the funds are cashed out of the account prior to filing a bankruptcy, the cashed out funds will no longer be protected as retirement funds.  You should always consult with an experienced attorney before cashing out any retirement accounts.

Of course there are always special circumstances where a typical retirement account may not be protected. In order for a retirement account to be exempt, the account needs to be ERISA qualified. The most common retirement accounts, 401(k), 403(b), TSP, PERA, MSRS, TRA, are generally all qualified accounts. IRA’s are also generally qualified, but the courts have ruled certain IRAs are not exempt. These include inherited IRAs or IRAs from a divorce. If you have an IRA and the funds were all from your earnings, it is exempt and protected from creditors. There are also other accounts that people may consider their retirement funds, but would not be protected as a retirement account in a bankruptcy. These include stock accounts and non-qualified annuities. But they may be protected under another exemption.

Bankruptcy exemptions can be complicated and there are many gray areas. You should consult with an experienced bankruptcy attorney to know for sure what retirement accounts are exempt and protected from creditors through the bankruptcy process and wait to make any changes to those accounts until after consulting an attorney.

Written by Gina Beckman

1. Gina Beckman is a graduate of St. Thomas School of Law, where she studied bankruptcy law and was accepted into the bankruptcy clinic. She was also accepted into an externship with a bankruptcy judge. She has been practicing bankruptcy law for 4 years.

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