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Bankruptcy and Retirement



You are considering filing for bankruptcy, but there is one very important asset of yours that you do not want to lose: your retirement account. Are retirement accounts protected from bankruptcy creditors?

What Is ERISA and How Does It Protect My Retirement Account?

ERISA stands for the Employment Retirement Security Act of 1974. It was intended to protect employee pensions from risky investments made by employers and pension administrators. However, as time progressed, more employers went from defined benefit pension plans to the more familiar 401(k) plans where they match employee contributions. ERISA has an effect on those as well. If your 401(k) plan is through your employer, it is an ERISA-qualified plan and cannot be taken by anyone, including your bankruptcy trustee, to pay creditors.

What About IRAs?

Another common account used to fund retirements is the individual retirement account, or IRA. If your IRA is ERISA-qualified, it cannot be taken in bankruptcy. The problem is that a lot of IRAs are not. How can you tell? If your employer does not contribute to your IRA, it usually is a tip-off that it is not ERISA-qualified. That means any IRAs that you have funded by yourself with your own money are likely to be included in the assets collected by the bankruptcy trustee and split amongst your creditors. If you have something called a deferred compensation plan, that can get tricky as well. Chances are, it will be included in the bankruptcy proceeding.

What About Trying to Be Clever?

Suppose you have a 401(k) and decide to make a large contribution to it to keep those funds from being considered in the bankruptcy proceeding. Probably not a good idea. In cases like this, a bankruptcy court can allow the bankruptcy trustee to use your 401(k) to pay creditors since you were playing fast and loose with the rules.

If you are considering bankruptcy, be sure to retain a qualified bankruptcy attorney who can advise you of all the benefits and drawbacks of the action. Also be sure to tell your attorney about all your retirement accounts and whether they are ERISA-qualified. You can find out for sure by asking your employer.