Are my IRA and retirement annuity exempt from Chapter 7 bankruptcy claims?

Filing Chapter 7 bankruptcy is a very difficult decision, but at times it is the only option for some individuals facing a financial crisis. Filing Chapter 7 bankruptcy may allow some debtors to discharge certain debts, but it could also force certain debtors to liquidate certain non-exempt assets. The good news is there are legal protections which may exempt certain property, and there are laws which protect certain investments.

Recently on our legal forum a user asked, “If I am considering filing Chapter 7 bankruptcy does this automatically mean that my IRA and my retirement annuity will liquidated or can I keep some of my money? I hate the idea of trying to start over without any investments.”

Legal protections offered for an IRA through bankruptcy laws

In 2005, under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA), bankruptcy laws were tightened, making it more difficult for certain debtors to qualify to file Chapter 7 bankruptcy. Now certain debtors with higher incomes will have to file Chapter 13 bankruptcy and repay a certain percentage of their debts through a 3 or 5 year retirement plan.

Although the (BAPCA) made it more difficult to file Chapter 7 bankruptcy, it also provided additional protection for IRA investors. In fact, under the new laws, contributory and Roth IRA assets are now protected from creditors in bankruptcy up to a $1 million (exceptions may exist for the IRS).

Legal protections offered for other retirement plans

Now what about other types of retirement plans such as employer-sponsored plans like 401(k)s and 403(b)s? Retirement plans that meet the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) have long been excluded from the Chapter 7 bankruptcy process.

Additionally, according to Investopedia, this protection also includes, “Any rollover money that is constructively received by the plan or account owner, as long as it is rolled back into an IRA or qualified plan within 60 days.”

Legal protections not offered through bankruptcy

Although the Bankruptcy Abuse and Consumer Protection Act (BAPCA) of 2005 extended some protections to certain investments, it did not eliminate the right of creditors to seek payment for debts if you decide to take a distribution from your plan, including Required Minimum Distributions and hardship withdrawals.

Prior to taking any distribution from your plan you should discuss the legal ramifications with legal counsel, a tax advisor, or the plan administrator.

Should I file Chapter 7 or Chapter 13 bankruptcy?

Legal protections offered for your IRA or other retirement accounts which meet the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) will apply whether you decide to file Chapter 7 or Chapter 13 bankruptcy.

As mentioned above, whether you decide to file Chapter 7 or Chapter 13 bankruptcy will depend on several other factors. Specifically, whether your income level is low enough to qualify for Chapter 7 bankruptcy and whether you have assets which you would like to keep.