Are Pensions Exempt from Bankruptcy?

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Many pensions are exempt from bankruptcy--but not all, and which pensions after bankruptcy are exempt (and to what extent) may vary by state.

Exemptions Generally

Exemptions apply to a Chapter 7 bankruptcy. In Chapter 7, the debtor's property and assets are liquidated for the benefit of creditors--the creditors are paid to the extent of the proceeds from the liquidation, then remaining debts are discharged, or cancelled. To make sure that the debtor has enough for a fresh start, certain kinds of property or assets are exempt, or protected from, being liquidated. Some assets are protected entirely; others are protected up to a certain amount.

Federal Bankruptcy Exemptions

Under federal law (found in the United States Code at 11 U.S.C. Section 522), payments made from or under pension plans (and also profit sharing plans, annuities, and similar plans) are exempt "to the extent reasonably necessary for the support of the debtor and any dependent of the debtor." There are are few types of plans that may not qualify, so it's important to consult with an attorney to make sure that your particular plan is exempt; however, since the majority of pension plans would quality, there is as least partial protection for payments received from them--to the extent necessary for support.

In addition, qualified 401(k)s and similar tax-exempt retirement accounts are also exempt. (Though note: your money is only exempt as long as its in the account; once you withdraw it or take distributions, creditors may be able to reach it.)

State Bankruptcy Exemptions

In addition to the federal exemptions, states are allowed to have their own bankruptcy exemptions. Some states build on the federal exemptions and add additional ones. Other states have a distinct list of exemptions and allow the debtor to choose to use either the state exemptions or the federal exemptions--whichever are better or more advantageous. It's not uncommon for states to add greater bankruptcy protection for pensions, especially those of state or municipal workers. For example, a state may make payments from such a pension entirely exempt, rather than exempt only to the amount needed for support.

How An Attorney Can Help

What is and is not exempt can get complicated, especially once state as well as federal exemptions are considered. An attorney can help a debtor filing bankruptcy make sure that he or she takes advantage of every exemption to which he or she is legally entitled.