Most retirement savings accounts are considered either exempt or not part of the bankruptcy estate and, therefore, are protected from turn-over during Chapter 7 bankruptcy. When an account is considered “not property of the bankruptcy estate” it cannot be taken by the bankruptcy trustee for distribution to creditors.
The U.S. Supreme Court has held that an employee’s interest in an employer pension plan (that qualifies under ERISA) is not property of the bankruptcy estate. The Bankruptcy Code also protects certain retirement funds during a Chapter 7 bankruptcy case. Retirement accounts classified under sections 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code are exempt from collection (up to certain amounts). These sections cover most retirement plans and include pension plans, profit sharing plans, stock bonus plans, employee annuities, IRAs, Roth IRAs, government deferred compensation plans, plans of tax exempt organizations, and certain trusts. The laws generally exempt these accounts up to a million dollars for each debtor.
Other retirement accounts not otherwise exempt are protected if they are necessary for the support of the debtor and the debtor’s dependents. Finally, bankruptcy laws protect certain retirement accounts like 457 deferred compensation plans, 403(b) tax deferred annuities, and health insurance plans regulated by state law.
However, every case is different. This year one bankruptcy court in Texas found that an IRA that was inherited by a debtor in bankruptcy did not receive the same retirement account protection under the bankruptcy laws. In that case the court found that the IRA would only receive retirement account protection in bankruptcy if the debtor was the account holder and not merely a beneficiary.
If you are experiencing debts you cannot pay, speak to an experienced bankruptcy attorney before taking any withdrawals from your retirement account. In many cases your debts can be discharged during bankruptcy and your retirement account fully protected from creditors.