Can People Lose Their Retirement Funds in Bankruptcy?
Several types of bankruptcy can potentially affect a person's assets. If he files personal bankruptcy, then he might have to relinquish some of his assets to offset creditor's losses, but retirement accounts are usually exempt. If a company holding assets such as retirement accounts declares corporate bankruptcy, however, in some cases this can potentially affect employees' benefits, warns the United States Department of Labor.
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When You File Bankruptcy
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If you file bankruptcy because you can't pay your bills as promised, you'll probably elect a partial debt repayment plan in Chapter 13 or a debt-forgiveness program under Chapter 7. Unless you committed some type of fraud to fund your retirement accounts like IRAs and 401k plans, you cannot lose your retirement funds regardless of your bankruptcy status. The same rule applies to pension plans and disability benefits.
When Your Employer Files Bankruptcy
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Your employer also has the legal right to declare bankruptcy and will likely elect either a Chapter 11 partial debt repayment plan or debt liquidation under Chapter 7. Whether or not you get to keep your pension plan, retirement benefits in custody of the employer's representatives and health benefits really depends upon the type of bankruptcy filed, according to the U.S. Department of Labor. If your employer declares Chapter 7, you'll likely lose most of your benefits with your company. Exceptions apply to pension plans, as federal law requires companies offering them to hold those assets in separate accounts from other types of employee benefits. But in most Chapter 11 cases you will get to keep all of your benefits.
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Other Asset Considerations
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When you file Chapter 7 bankruptcy, you risk losing many of your non-retirement assets, warns the book "How to File for Chapter 7 Bankruptcy." Chapter 13 filers usually lose fewer if any of their assets because they are partially repaying debts. Whether or not you can keep all of your real estate equity, motor vehicle value, stocks, bonds, jewelry, cash on hand and deposit accounts depends upon your state of residence and the type of bankruptcy you file. You can usually keep basic personal possessions and household furnishings.
Debts Ineligible For Bankruptcy Assistance
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It's important to realize that while your retirement accounts will survive the bankruptcy process, so will your obligations to pay certain types of debts. You can't reduce or eliminate your commitment to pay child support, alimony, court fines, civil judgments related to criminal activities, future debts or bills incurred right before bankruptcy. Only in rare cases like a serious disability or a college going out of business will a bankruptcy judge allow you to eliminate your obligation to repay federally-backed student loans.
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