retirement accounts in chapter 7 bankruptcyYou don’t want to get old, do you?  And if you are old then you don’t want to get older, right?  Thankfully, if you’re filing Chapter 7 bankruptcy then you don’t need to worry about the process of aging being more difficult than it already is.

That’s because you don’t probably don’t need to worry about your retirement accounts being taken in a Chapter 7 bankruptcy.

The government has created a safety net for people who need to save for old age (which means everyone) in the form of the Employee Retirement Income Security Act (ERISA).

Under ERISA, retirement accounts such as 401k, 403b and 457 plans are generally protected from being taken in a Chapter 7 bankruptcy.

To Be Protected In Chapter 7, A Retirement Plan Must Be Qualified

To be a “qualified” plan under ERISA, the plan governing the retirement accounts must satisfy all of the following conditions:

  • must offer Joint and Survivor benefits;
  • may not discriminate in favor of officers; and
  • must have certain “vesting” rules- you must have full ownership after a maximum of 6 years.

IRAs and Roth IRAs are both sub-types of ERISA qualified plans, though the employer generally does not make any contribution.

Though ERISA-qualified plans and IRAs cannot be taken by the trustee in a Chapter 7 bankruptcy, you’re still required to disclose the asset on your bankruptcy schedules.  The trustee will double-check your claim that the retirement account is qualified.

Word Of Caution About Giving Away The Retirement Plan

Let’s say you’ve got retirement accounts and decide to give one of them to someone else.  You take the money out of one of the retirement accounts and hand it over.

Bad move.

If you do that, the Chapter 7 trustee could recover the money and distribute it your creditors – even though it would have been exempt if you’d kept it where it was.

The court decision can be found in Tavenner v. Smoot, 257 F. 3d 401 (Court of Appeals, 4th Circuit 2001) in case you’re wondering.

Best To Be Sure

There are limits to keeping retirement accounts in Chapter 7 bankruptcy, so be sure to let your lawyer know everything.  He or she may need to talk with your plan administrator to be sure everything’s squared away before filing, which is good – a mistake could mean the difference between a happy retirement and working until the day you die.

And don’t you want to grow old gracefully?

Jason Krumbein is a consumer protection lawyer in Richmond, Virginia.

Image credit:  Old Shoe Woman