Your IRA and Other Retirement Accounts are Exempt in Bankruptcy

If you're a retiree--or just concerned about your eventual retirement--and are worried about what will happen to you if you file bankruptcy, there's one less thing to worry about: your IRA is protected by bankruptcy, as is your 401(k) and similar accounts.

How Chapter 7 Bankruptcy Works

In a Chapter 7 (Liquidation) bankruptcy, the debtor's assets are liquidated for the benefit of creditors. The creditors are paid as much as is possible from the debtor's assets--his or her property, belongings, investments, and savings--then any remaining debts are discharged, or eliminated.

Exemptions Help the Debtor Start Over

The purpose of bankruptcy is to allow a financial distressed person a chance to start over, free from debts. Creditors are paid as much as they can be, since it would be unfair to put all the burden on merchants and lenders who sold goods, provided services, or loaned money to the debtor in good faith. However, if the debtor were wiped out, he or she wouldn't be able to start over. To strike the right balance between these two competing goals--fairness to creditors; a new start for the debtor--certain assets are exempted, or protected, from being liquidated for creditors.

IRAs and 401(k)

Saving for retirement can--and should--be a life-long endeavor. If a debtor's retirement savings were wiped out, he or she might never have the time or opportunity to start over. In recognition of that, the law excempts debtors IRAs and 401(k)s--as well as certain other retirement savings--from liquidation.

Exemption Not Necessary for Chapter 13

If you're filing a Chapter 13 bankruptcy, exemptions don't matter: your assets are not liquidated in Chapter 13. The exemptions protect you in a Chapter 7 bankruptcy.

How an Attorney Can Help

An attorney can advise you as to which of your assets are exempt, and help make sure you take advantage of every exemption to which you are entitled.