Bankruptcy Protection for IRA and Other Retirement Funds

If you file for a chapter 7 bankruptcy, you need to understand exactly what you are getting into. In a chapter 7, most of your assets are liquidated, or turned over for sale in a sheriff's or bankruptcy sale. However, there are certain things that you do get to keep in a chapter 7. These things include retirement funds and accounts, as well as some home equity. It is very important to be aware that there are these bankruptcy IRA and retirement account protections in place, so you can rest assured that you won't be giving up all your future savings when you file bankruptcy.

Understanding Chapter 7 and Exemptions

Chapter 7 bankruptcy isn't for everyone. To file for chapter 7, you need to pass a means test where you show either:

• That your income is below the state median
• That you are unable to pay for your debts and still maintain any sort of reasonable standard of living based on your income

Once you pass this test, then you become eligible for a chapter 7. The major benefit of this is that most of your debts (other than those that can't be bankrupted- like student loans) are discharged. Of course, the downside is that assets have to be listed and turned over for sale. While this is only fair to creditors- after all, it wouldn't be right if you could go bankrupt and keep thousands or even hundreds of thousands of dollars of possessions while creditors got nothing- it is also hard for people to deal with. 

The government does, however, recognize that certain types of accounts shouldn't be turned over. These include retirement accounts, such as an IRA or 401K, because the government wants you to be able to have money to live on when you are older and can't work. Some of the equity in your house is also exempt. 

One thing to note, however, is that it is not a good idea to move money into IRA or retirement accounts purely to shield it from bankruptcy, as this can be considered a fraudulent transfer. This could void your bankruptcy filing and even subject you to additional penalties. If you have sufficient assets that you are worried about having them seized, a chapter 13 may be a better option for you. 

Getting Help

When dealing with bankruptcy, it is a good idea to get professional advice. An experienced lawyer can help you to understand how chapter 7 will work for you and whether this or another chapter of bankruptcy is your best choice.