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Retirement savings in bankruptcy

More and more, retirement savings or pension rights are the single most valuable asset of individuals filing bankruptcy.  Two separate concepts determine whether creditors and bankruptcy trustees have any rights to the debtor's retirement assets:  

•     Is the retirement fund property of the estate? 
•     If the retirement fund is property of the estate, can it be exempted?

Property of the estate?

The Supreme Court held that retirement plans that have a legally enforceable  anti alienation clause (a provision preventing creditors from attaching the retirement funds of a debtor)  are not property of the bankruptcy estate and thus are not subject to the jurisdiction of the bankruptcy court and cannot be accessed to pay creditors.  

Nearly all pensions and 401K savings plans that are qualified under ERISA, the federal pension savings act, have an anti alienation clause that excludes them from the bankruptcy estate.  

An exception to this rule is retirement plans that have only one participant, such as single employee corporate plans, and some other plans originating in self employment.  These plans may be property of the estate.  They may be vulnerable to creditors unless subject to an exemption.  Get good professional advice if this describes a significant asset of yours. 

Assets that are not property of the estate don't even have to be the subject of a claim of exemption:  these funds simply don't enter into the equation regardless of the size of the benefit.

Exemptions for retirement savings

When retirement savings are property of the estate, because they are not ERISA qualified, or because they are held in an IRA, they may be exempted from the estate under the available exemption statutes.  

Property that is exempt is removed from the estate and is not liable for the payment of creditor claims.  The exact scope of the exemption and how much value can be exempted depends on the language of the exemption selected.  

  More on exemptions

Exemption expanded

Recent amendments to the Bankruptcy Code have created a federal exemption for IRA's and like retirement vehicles capped at $1 million, and made that exemption available in all states. § 522(n).

Also, the repayment of loans from 401(k) plans is expressly permitted in Chapter 13, a marked change for the better under the 2005 amendments. § 1322(f).

  Tax liens on retirement savings

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2/25/07