Which Retirement Investments Are Protected Under Chapter 7?

2 February 2021
 Categories: Law, Blog


When you file for Chapter 7 bankruptcy, many of your assets will be liquidated to pay down your debts. Then, any debts that are left behind will be discharged. However, there are also some assets that will be exempt from liquidation. If you have been planning for your retirement, you might wonder how your bankruptcy will affect your retirement accounts and investments. 

The Liquidation of Your Assets

A trustee is responsible for liquidating your assets. This is done under the supervision of the courts. If your investments are bringing in too much money, you may not be eligible to file for Chapter 7.

Retirement Accounts

Since 2005, all ERISA-qualified retirement accounts have now become exempt from creditors with some exceptions. The type of exceptions depends on the state in which you reside and you will want to consult with a local attorney about whether your retirement account is exempt. For example, a 401(k) account will be protected.

Some retirement accounts are potentially subjected to liquidation such as traditional and Roth IRAs. Until 2022, traditional and Roth IRAs will be exempt up to $1,362,800 per person. Anything past that will be liquidated and used to pay off creditors. 

Mixing Funds

Any assets that are exempt, such as Social Security benefits, should not be mixed with your other assets. Otherwise, this can increase the odds that your Social Security benefits will need to be liquidated and used to pay creditors. Also, if you withdraw money from your retirement account, this will be considered an income for bankruptcy purposes.

If you are withdrawing funds and you have very few assets, your funds might be judgment-proof. However, if you are protected from a judgment, you may want to speak with an attorney because it might not be worthwhile to file for bankruptcy.

Protect Your Retirement Accounts

Rather than withdrawing from your retirement account, it's better to create a savings plan and focus on creating healthier spending habits. When you are going through the process of bankruptcy, you will usually be required to participate in credit counseling. By doing so, you should be able to still have the retirement funds necessary to pay for your retirement.

If you have any other sources of income, make sure to speak with an attorney from your state. For example, with annuities, the rules can be more complex and they will also be specific to the state within which you are filing.

For more information, contact a bankruptcy lawyer today.