Filing for Bankruptcy – How Retirement Accounts Are Affected

Published on Aug 13 2012 // Written By // Finance 101, Personal Finance, Retirement

Most people don’t want to file for bankruptcy and put off doing so for as long as possible.  Some are ashamed and don’t want a bankruptcy on their record for seven or more years.  Others are worried about losing everything including their cars, home, and retirement accounts.

If you do have to file bankruptcy, feeling a sense of shame is normal, but remember that many people have filed bankruptcy before including Samuel Clemens (pen name Mark Twain) and Ulysses S. Grant.  More recent famous bankruptcy filers include Willie Nelson and Larry King.

Another comforting thought is that in most cases, your retirement accounts will not be affected in bankruptcy.

What Retirement Accounts Are Not Affected by Bankruptcy

Thanks in part to the 2005 revision of bankruptcy laws, your retirement accounts will remain safely in your possession.  Retirement accounts that are not affected by a bankruptcy filing include:



-IRAs (Roth, SEP, and SIMPLE)


-profit-sharing plans

-money purchase plans, and

-defined benefit plans (NOLO).

Limits on Retirement Accounts

If you have more than $1.17 million in your IRA or Roth IRA, the bankruptcy court can take the additional money to cover your debts.  However, there are three things to keep in mind here:

  1. The amount is $1.17 million per person, so each spouse could hold that much in their retirement account, giving a couple up to $2.34 million.
  2. The $1.17 per person is a total of all of your IRAs or Roth IRAs, not each individual account.
  3. The amount that a person is able to retain in his or her IRA or Roth IRA increases every 3 years to keep up with inflation.

Inherited Retirement Accounts

Another tricky area is inherited accounts.  If the person filing for bankruptcy inherited an IRA for example, and he cannot add money to that retirement account himself because it is not in his own name, that inherited retirement account is not protected and can be taken by the bankruptcy court to pay down debts.

Avoid Liquidating Your Retirement Accounts Before Bankruptcy

Many people take the drastic measure of liquidating their retirement accounts in an attempt to pay down their debts.  This is not a wise move for several reasons.

  1. You will pay penalty fees upwards of 30% of your overall retirement balance for early withdrawl.  If you have $500,000 in your retirement account, you will only have $350,000 available to use.  The other $150,000 will likely go to pay early fees.
  2. Often, there is not enough in the retirement accounts to pay down the entire debt, so the individual still has to file for bankruptcy and now he also does not have any retirement savings.
  3. Retirement savings is exempt from bankruptcy filing, so there is no need to liquidate it to pay down debt.  You will need the retirement savings to pay your bills in retirement.

While the decision to file bankruptcy is never an easy one, most people can rest assured that even if they do need to file for bankruptcy, their retirement savings will remain intact.





Melissa is a freelance writer and mom to three children ages 7, 2 and 1. She blogs at Mom's Plans where she shares how her family is learning to live a fulfilling life on less.

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