File Bankruptcy Before Using Retirement Funds

Using your retirement funds to prevent bankruptcy is not a wise idea. Do not exhaust your retirement funds before filing bankruptcy. retirement accounts are exempt from bankruptcy.

Protection Under Bankruptcy Laws

The Employee Retirement Income Security Act of 1974 (ERISA) and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provide federal protection for retirement assets upon bankruptcy. However, there can be significant differences in protection based on the type of retirement account.

Retirement Assets

Your 401k is exempt from bankruptcy. Your ira is protected by bankruptcy. However if before filing bankruptcy, you use your retirement funds as a collateral for any debt, the creditor can come after your retirement funds. Until 2005, whether a retirement asset was exempt from bankruptcy depended whether the retirement plan holding the assets was an ERISA or a non-ERISA retirement plan. For non-ERISA retirement plans, the level of protection was determined by the laws of the debtor's state of residence, while the protection for ERISA plans was based on federal law.

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) changed all that. Now all IRA is protected by bankruptcy. Both ERISA and non-ERSIA plans are now fully excluded from a debtor's bankruptcy estate. Under the BAPCPA, traditional and Roth IRA assets are excluded up to a limit of $1 million. This limit does not include amounts rolled over from SEP IRAs, Simple IRAs and other employer-sponsored retirement plans, including qualified plans. SEP and Simple IRA assets are excluded from the debtor's bankruptcy estate for unlimited amounts. The Act also reinforces the unlimited protection that existed for 401(k) plans. A debtor’s 401k is exempt from bankruptcy.

BAPCA vs. ERISA

Protections under BAPCPA are not as strong as those under ERISA. Specifically BAPCPA doesn’t protect IRA assets in excess of $1 million. This cap doesn’t apply to Simple, SEP and rollover IRAs. Meaning if you rollover your 401(k) to an IRA the entire rollover amount is protected even if it exceeds $1 million. Claiming protection for your retirement assets in bankruptcy is a complex process. Even a small mistake can prove costly. Use the exemptions provided under law for your benefit. An experienced bankruptcy attorney can help you avail the maximum protection for your retirement assets in bankruptcy.