Can You Lose Your Retirement Funds by Filing Bankruptcy?

Sometimes the need to file for bankruptcy cannot be avoided. A petitioner may have accumulated substantial assets before filing. Some assets may need to be liquidated, but fortunately others are exempt, including retirement plans.

Chapter 7

This form of bankruptcy, "liquidation," is the form used when there is no ability to repay debts. To file, a petitioner must list all creditors and the amount owed them, state income, list all assets owned and supply a list of all expenses related to activities of daily living.

Purpose for Bankruptcy

While it is not a favorable event, bankruptcy provisions allow for the protection of debtors from extraordinary hardship. It is also designed to be as fair as possible to both parties--creditors included. Again, some assets are exempt from attachment.

11 USC § 522

Section (b) (3) (C) of this code identifies the exempt status of retirement plans, such as 401, 403 and 457 plans as defined under the Internal Revenue Code of 1986.

Significance

Chapter 7 bankruptcy seeks to take proceeds from a petitioner's saleable assets and use them to satisfy creditors claims against them. It does not permit those assets essential to the long-term security of the filer to be included.

Tip/Warning

Bankruptcy is a complicated procedure with many potential pitfalls. Consult an attorney qualified to address your specific needs.

References

• U.S. Courts: Liquidation Under the Bankruptcy Code
• Doney & Associates: 11 U.S.C. 522