Will I Lose My Retirement Account or Social Security Payment If I File for Bankruptcy?

By Cara O'Neill, Attorney
In most cases, you’ll be able to keep all of the funds in your retirement account and all of your Social Security payments if you file for bankruptcy.

One of the benefits of bankruptcy is that you don’t lose everything. You’re allowed to keep certain assets, such as your retirement savings and benefit payments. But the general rule has limitations. Here’s how it works.

If your retirement account is an ERISA-qualified pension plan—which most are—you can exempt (protect) all of the funds in the account. ERISA-qualified plans include:

  • 401(k)s
  • 403(b)s
  • IRAs (Roth, SEP, and SIMPLE)
  • Keoghs
  • some profit-sharing plans, and
  • defined benefit plans.

However, if you have a traditional or Roth IRA, your exemption amount will be limited to $1,283,025 per person (as of August 2016). Also, once you receive a distribution, the funds take on a different character. Retirement distributions—such as your monthly pension payment—must be included in your income and therefore, might affect your ability to qualify for bankruptcy. You’ll have to include such funds as income on the Chapter 7 bankruptcy means test (the test that determines whether your income is low enough to qualify for Chapter 7 bankruptcy). Additionally, once you receive the distribution, it becomes a cash asset that’s no different than the money in your bank account, so you’ll need a separate state exemption to protect it just as you would other money that is immediately available to you.

Like your qualifying retirement account, your Social Security benefits are exempt from bankruptcy. By contrast, the funds you receive each month are exempt, as well—and even better yet, you won’t include monthly Social Security benefits in your means test calculation. But there’s still a catch. You must be able to prove that the funds are indeed Social Security funds.

If you comingle (mix) your Social Security payment in an account that you use to deposit money from other sources, the Social Security funds won’t be protected. For instance, suppose that you put your $500 Social Security payment into the checking account you use to pay for food and other necessities, and you deposit your spouse’s paycheck in that same account. If the account balance is $3,000 when you file for bankruptcy, the court won’t be able to tell how much of it, if any, is Social Security funds. For all the court knows, the entire balance might be your spouse’s wages. If you want to prevent this problem from occurring, the best course of action is to maintain the funds in a separate bank account. That way you’ll be able to keep your benefits in bankruptcy, and even protect the funds from other collecting creditors, too.

Go to the main bankruptcy FAQ page.

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