A common concern for many people filing for Chapter 7 or Chapter 13 bankruptcy is whether their retirement account will be protected. Bankruptcy law is very generous about protecting debtors’ retirement accounts such as IRAs, 401ks, and pensions. The vast majority of these retirement plans are “exempt,” or fully protected, under law.
Retirement plans governed by the Employment Retirement Income Security Act (ERISA), such as 401(k)s and 403(b)s, are fully protected, and are not even considered to be part of the debtor’s property for bankruptcy purposes. Employer-sponsored IRAs, which are also regulated under Federal law (virtually all are), are also fully protected. IRA’s established by individual debtors, rather than through their employers, are still protected under Federal law up to almost 1.3 million dollars. Minnesota State employee’s pension plans are also fully protected under both State and Federal law. However, any private employee pensions, not governed under Federal law, would only be protected up to $75,000, under Minnesota law.
There are some notable exceptions to the general rule that retirement accounts, such as IRAs and 401ks are protected in a bankruptcy, however. The United State Supreme Court in Clark v. Rameker ruled that inherited IRAs do not constitute true retirement accounts, and therefore, are not protected under Federal law. It remains unsettled law as to whether inherited IRAs are protected specifically under the Minnesota Statutes, which generally protect retirement accounts up to $75,000.
IRAs transferred from one spouse to another in a divorce have also been ruled to not be true retirement accounts subject to protection under bankruptcy law in one court case. In another case, the court decided that both an IRA and 401k are not exempt when transferred from one spouse to another pursuant to a divorce decree. The facts of that case were a bit unusual, however, and the law remains a bit unsettled on whether transferred 401ks are, in fact, not protected.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT LIFEBACK LAW
This is a very brief and generalized overview of how retirement accounts are treated in bankruptcy. To determine how a bankruptcy would impact your retirement account, you should speak to an experienced bankruptcy attorney. See us at LifeBackLaw.com!
