Will My Retirement Account Be Taken In Bankruptcy?

by Bankruptcy Law Network (BLN)

September 14, 2008

The answer in almost every case is No!  To start, in Chapter 13, assets are never taken and liquidated. Instead, most Chapter 13 Plans are funded from earnings, and your retirement plan would be used to fund the same only if you so voluntarily chose.

In Chapter 7, retirement accounts are likewise generally never taken since they are either exempt or not even considered part of the Bankruptcy Estate in the first place.

When Congress changed the Bankruptcy Laws in October, 2005, they really helped debtors in numerous ways.  One such way was the addition of 11 USC 522(d)12 which permits the debtor to exempt retirement funds to the extent they are in a fund or account that is exempt from taxation under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code (“IRC”).

These IRC sections practically encompass all retirement plans out there (pension plans, profit sharing plans, stock bonus plans, employee anuities, IRAs, Roth IRAs, government deferred compensation plans, plans of tax exempt orgainzations, and certain trusts).  The amount they are exempt to are $1,095,000 for each spouse!

The addition of 522(d)12 furthers the previous protection of 522(d)10(E) which was not amended, and still exists to exempt retirement funds necessary for the support of the debtor and the debtor’s dependents. Indeed 522(d)10(E) is still necessary since that provision is generally used to exempt the payments coming out of the plan and for other plans not exempt from taxation under the IRC.

There also exists protection under 541(b)7 as well which does not even make an exemption necessary on certain retirement accounts subject to title 1 of ERISA, 457 deferred compensation plans, 403(b) tax deferred annuities, and health insurance plans regulated by state law.

Finally, §541(c)2 likewise exists to make such exemptions unnecessary by removing from the bankruptcy estate, certain retirement plans or trusts which contain an alienation clause enforceable by state law.  In determining the applicability of 541(c)2, courts look to the dominion and control the debtor has over the asset.

At one end of the spectrum are cases wherein the debtor could only access such funds at retirement, death, termination, etc.  These are always considered not part of the estate if they contain such an alienation/spendthrift provision.  On the other hand, a trust or plan set up by a single shareholder, self funded, with complete control over trust and corporation is not excluded by 541(c)2 and considered part of the estate.  For real case examples, compare the cases In re Kincaid, 917 F2d 1162 with In re Winter, 148 BR 930.

While these are federal protections, also keep in mind that your state may also have state exemptions which also protect such retirement funds.  For example, in California, there are even more exemptions that protect retirement accounts under CCP 704.110 to 704.115 and CCP 703.140(b)(10)(E).

So what is the bottom line?  Your retirement account should be exempt and untouchable in bankruptcy in almost every case.  Only in the rarest of cases, such as when the retirement plan is not truly a retirement plan/was improperly funded/or created out of a fraudulent sham, might your retirement account be subject to problems.

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Last modified: September 27, 2011