How Does Bankruptcy Affect The Retirement Plans?

When you work your entire adult life, the prize at the end of the game is supposed to be a comfortable retirement. With this end in sight, many people choose to set up retirement accounts, either by themselves, through a financial planner, or with the help of an employer. These plans are vital to the success of people’s retirement goals, but what happens in a bankruptcy? When it comes to estate planning and retirement, how does bankruptcy affect retirement plans?

Bankruptcy and Retirement Planning

Retirement plans are one of the biggest concerns of those who file for bankruptcy protection. After all, saving your whole working life only to have those savings immediately wiped out is never a good thing. Fortunately, the Employment Retirement Income Security Act (ERISA) provides protections for some retirement accounts.

ERISA-Qualified Retirement Plans

ERISA-qualified plans are those that an employer establishes and meets specific IRS tax-exempt guidelines. Examples of ERISA-qualified retirement plans include:

410(k)
403(b) or any profit-sharing program
457(b) deferred compensation retirement plans
Tax-exempt organization retirement plans
Governmental retirement plans

If your retirement plan qualifies as an ERISA plan, it is protected should you file for bankruptcy. The U.S. Supreme Court determined that these plans are not property included in a bankruptcy filing and are protected up to an unlimited amount.

Non-ERISA- Qualified Retirement Plans

While non-ERISA retirement plans do not have an unlimited amount of protection, they are afforded some protection under federal bankruptcy laws, particularly under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Examples of non-ERISA-qualified retirement plans include various types of IRAs, as well as similar retirement policies.

Unlike qualified ERISA plans, the IRAs have an exact cap of what is protected from creditors. Traditional and Roth IRA plans have a cap of $1,362,800 for bankruptcy cases from April 1, 2019 through March 31, 2022. This cap applies to all combined accounts, not just each account, meaning, if you hold multiple retirement policies, the maximum you may protect is $1,326,800.

When Retirement Funds Aren’t Protected from Creditors

While there are protections in place to keep most retirement funds away from creditors in a bankruptcy, there are still instances where these funds are not safe. If, for example, the IRS places a lien against you, they may be able to access your retirement funds. Similarly, in a divorce, a family law court may award part of your retirement policy to your ex. Finally, once you remove money from your retirement fund, it loses federal protection and may be seized by creditors.

Contact an Experienced Bankruptcy Attorney Today

Bankruptcy, especially when it concerns retirement plans and other vital assets, is never fun. If you are finding yourself sinking in a sea of debt, but want to protect your hard-earned assets, you need to contact an experienced bankruptcy attorney right away. Call The Law Offices of Patrick L. Cordero for a free consultation about your bankruptcy case today at (305) 267-3376.