What Happens to Your Retirement Accounts in Your Bankruptcy?

Public policy favors you retain your retirement account(s) to enable you to support yourself and your family when you cannot work. Different retirement accounts receive different treatment.

401(k) Accounts in Bankruptcy

Most retirement-account funds remain safe and in place throughout a bankruptcy. That includes 401(k) accounts that you may hold with your current and/or former employer(s).

Check with your employer or 401(k) administrator to find out if the 401(k) plan in question is qualified under the Employee Retirement Income Security Act (ERISA). If, like most 401(k) plans, it is qualified, you're good and your account is safe in a bankruptcy. If it's not, though, some of it might be vulnerable. Per the folks at The Rutter Group, "The Bankruptcy Code limits the exemption amount for IRAs to $1,362,800, and may increase “if the interests of justice so require, [11 U.S.C. § 522(n)].” This figure is current as of April 1, 2019, and will change again on April 1, 2022, and every three years thereafter.

Keogh, Traditional and Roth IRAs (“Self-Employment”) Plans in Bankruptcy

Your Keogh, traditional or Roth IRA’s, get a bit of a different treatment in a bankruptcy than most 401(k)s. They have generous protections, currently $1,362,800 per person. It would be a shame to lose any amount beyond that, but $1,362,800 can take you far in retirement.

A Chapter 13 bankruptcy reorganizes your debts and protects IRAs further.

A Chapter 7 bankruptcy won’t protect any funds you withdraw from a retirement account; the funds must be within it to be protected.

Closely Held Corporate Retirement and Profit-Sharing Plans in Bankruptcy

Retirement benefit plans established by closely-held corporations remain safe and in place throughout a bankruptcy. These plans are treated as fully exempt “private retirement plans” even if you are the sole shareholder, executive officer, and plan trustee. Pre-bankruptcy, you may even use the retirement plan to partially ‘shield assets’ from a judgment creditor as long as the purpose of the plan is retirement.

Annuity Income in Bankruptcy

Annuities are contracts whereby you pay an entity (generally an insurer) a set amount in exchange for receiving a lump sum or, more typically, monthly payments for a certain period or for the rest of your life, beginning immediately or at a prescribed time.

While the protections for your 401(k) or IRA are easy to determine, the status of annuity income is far murkier. State Exemptions for annuity income protect the amount “reasonably necessary” for yours and your families support or not at all.

There is no protection for a single premium annuity that guarantees a stream of income and has no contingencies that can cause you to lose the right to payment.

All other annuities may be protected for the limited purpose of “reasonably necessary” for yours and your families support when you can show one or more conditions of an annuity's contract (i.e. the amount of the regular payment or perhaps the frequency of payments).

When you purchased the annuity can make a difference on the protection the bankruptcy provides. Annuities purchased more recently being less protected in a bankruptcy. (You don't want to look like you just plowed a lot of money into an annuity within the last few months or a year in order to protect it from creditors.)

Here are some rays of hope: If your annuity was funded with money from an IRA or another qualifying account, you should be able to exempt up to $1,362,800 of its value (with that sum being updated in 2022). You may also be able to exempt your annuity if it meets the criteria for IRS-qualified retirement accounts or if it meets some other standards, such as being tied to conditions of illness, disability, or length of service, among other things. Annuity issues and their status in bankruptcy are relatively complex; it is wise to seek counsel to properly protect your precious assets.

Life Insurance Contracts in Bankruptcy: What to Expect

Life Insurance Contracts are contracts whereby you pay an entity (generally an insurer) a set amount in exchange for receiving a lump sum. Life Insurance Contracts and Proceeds receive full, limited to “reasonably necessary” and no protection through Bankruptcy.

Any unmatured Life Insurance Contract remains safe and in place throughout a bankruptcy.

Life Insurance Proceeds received within 180 days after the bankruptcy petition is filed are not safe.

A Life Insurance Contract with Cash Value has limited protection, up to $14,325 or $12,800/$25,600 of your interest in any accrued dividend or interest under (or loan value) of any unmatured life insurance contract you own. The amounts protected depend on whether you use the State 703 or 704 Exemptions.

A Matured Life Insurance Contract has limited protection. The protection is limited to the extent it is “reasonably necessary” for yours and your family’s support.

Bankruptcy is a remedy for financial circumstances. The best “fresh starts” start with knowing your choices.

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