Individuals considering bankruptcy are often concerned about losing their retirement savings accounts. In most situations, unless you voluntarily choose to use the funds to satisfy debt obligations, filing for bankruptcy will not have an effect on your individual retirement savings. In a Chapter 13 bankruptcy, a debtor's assets are reorganized instead of liquidated and the bankruptcy plan is funded by the debtor's wages. During a Chapter 7 bankruptcy, retirement accounts are normally exempt or not considered part of the bankruptcy estate.
11 U.S.C. 522(d)12, passed in 2005, allows up to $1,095,000 in retirement funds exempted from taxation to be retained by each spouse when a debtor files for bankruptcy. This means retirement accounts established under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code cannot be liquidated through bankruptcy without your consent. Additionally, 11 U.S.C. 522(d)10(E) protects retirement payments used to support a debtor or the debtor's dependents from being considered by a bankruptcy court. Certain retirement plans governed by Title 1 of the ERISA statute and state regulated health insurance plans are also exempt from consideration by a bankruptcy court.
If a debtor cannot exercise dominion and control over a retirement account, it will be removed from the bankruptcy estate. This means if the person filing for bankruptcy cannot access the account except at specific life events such as retirement, termination, or death, it will not be considered by a bankruptcy court. On the other hand, if the debtor has total control over a self-funded account that is not subject to one of the federal exemptions discussed above, the account will usually be considered a part of the bankruptcy estate. It is important to note that states such as California provide additional protections for an individual's retirement account which extend beyond those established by Congress.
Generally, an individual's retirement fund will be protected in almost every individual bankruptcy proceeding. If your employer files for bankruptcy, however, your retirement account might be at risk of terminating. How an employee's retirement fund is affected will depend on the type of bankruptcy a company chooses to file. If an employer files for Chapter 11 reorganization, retirement plans may continue to exist throughout the process. If instead a business files for Chapter 7 liquidation, both retirement and health plans will generally end immediately.
Even when an employer liquidates its assets and ceases to exist, a worker's pension benefits will generally be protected from business creditors. The ERISA statute requires that all retirement funds promised by an employer be held in a trust account separate from the company's business assets. Additionally, if an employer's retirement or pension plan is terminated, an employee is immediately 100 percent vested in the plan. Some defined benefit plans are also insured by the United States government through the Pension Benefit Guaranty Corporation. A skilled California bankruptcy lawyer can further explain the protections that apply to retirement accounts during bankruptcy proceedings.