If you find yourself in a position where a chapter 7 or chapter 13 bankruptcy seems like the best path forward, you’ll naturally have questions. You could be wondering about the pros and cons of filing, and how employment opportunities may be affected. For those who have a retirement plan set up with their employer, you could be concerned that creditors may gain access to your hard-earned retirement funds. 

At Hausen Law, we understand your concern. After working for years–or a lifetime–to accrue the funds that will carry you comfortably through retirement, the thought of losing these is frightening. In this article we’ll lay out what you need to know about retirement accounts and bankruptcy.

ERISA-Qualified Plans and Protection From Bankruptcy

Laws vary between states, but the good news is that many if not most employer-sponsored retirement plans are protected if you need to file for bankruptcy in Ohio. The Employee Retirement Income Security Act (ERISA) of 1974 is key to this protection. As a general rule, retirement accounts set up under ERISA cannot be seized by creditors, regardless of amount. Plans that benefit from this protection could include employer-sponsored retirement plans such as 401(k) plans, pension plans and some 403(b) plans, as well as deferred compensation plans and profit-sharing plans. Individuals who work for a partnership, limited liability company, S-corporation, C-corporation, nonprofit or a very small business are generally eligible for protection.

Why are these accounts protected? Thanks to ERISA’s Anti-Alienation Clause. This clause asserts that your rights to the accrued benefits cannot be taken away, which prevents creditors from getting at these assets. Because retirement funds are not technically or legally yours prior to withdrawal, they can’t be seen as income and they also cannot be used to repay creditors during the bankruptcy process.

Exceptions to this general rule include those who work for churches or religious organizations or savings plans that operate outside of the United States. Also, non-ERISA plans don’t offer the same protection against creditors. These can include traditional and Roth IRAs. That said, under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, IRAs up to $1 million can receive federal protection.

Exceptions to The Rule

It’s reassuring to know that the creditors you may owe money cannot come after the funds that are held in your retirement account. But there are certain circumstances in which the money held in these accounts could be seized. These situations include:

• A qualified domestic relations order (QDRO) that orders funds to be given to an ex-spouse as part of the benefits as a marital asset or child support 
• Payment to the Internal Revenue Service for owed federal income tax debts
• Fees paid to the federal government for criminal fines and penalties
• Payment for civil or criminal judgments in which you are found guilty

Another situation in which an otherwise federally-protected IRA could be vulnerable is if you use an IRA for a prohibited transaction, such as security for a loan, or if you borrow from it. All of this said, the rules around qualified and non-qualified accounts can be confusing. It’s best to work with an experienced Ohio bankruptcy lawyer to ensure that you’re making the best decisions.

No Need for Early Withdrawal

Now that it’s clear that in general, and in most cases, creditors cannot come after funds in retirement accounts, it’s obvious that there is no need to withdraw and spend down those savings just to avoid seizure. Unfortunately, before realizing this built-in protection, some individuals fear the worst and therefore feel that they have no other option. Others may feel desperate and try to use retirement funds to alleviate their negative financial situation. While we can understand why people might go this route, neither choice is recommended.

Premature and unnecessary withdrawal and spending of retirement assets isn’t just a bad move in the long run, it will also impact you in the here and now, since you’ll have to pay additional income taxes the following year. And if someone who feels the need to take funds out before they otherwise would have is also below the minimum withdrawal age of 59 ½, they will be subject to a 10% early withdrawal penalty. 

All in all, there is a lot lost, and not much gained when retirement accounts are accessed early, merely to avoid them being involved in a bankruptcy case. We wish that individuals would view bankruptcy not as a last resort to turn to when they’ve expended all other options, but instead for what it truly is–a federally established form of consumer protection that can be just what’s needed to start on fresh financial footing.

Bankruptcy In Ohio? A Bankruptcy Attorney Can Help

While for the most part we can say that yes, retirement accounts are safe in bankruptcy, there are exceptions to most rules. And in any bankruptcy case, policies can overlap and laws can add layers of complexity. Thankfully, there’s no need to go it alone. 

At Hausen Law, we know that if you’ve come to the point of filing for bankruptcy in Ohio, your situation must seem bleak. But take our word for it–with the right team on your side, there is always hope on the horizon. 

Working with an experienced chapter 7 bankruptcy lawyer–like James Hausen and his team–is a great first step. Our Ohio bankruptcy lawyers are ready to help. Just give us a call or fill out our online contact form and we will be in touch. Hausen Law is happy to serve all of Northeast Ohio, including the Akron, Canton, Cleveland, Wooster, Dover/New Philadelphia, and Youngstown communities. Contact us today to set up a free consultation and learn how to keep retirement accounts safe while getting started on your way to financial recovery.