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What happens to my retirement in bankruptcy?

You have spent years preparing for your retirement. Your retirement accounts have slowly gained value through the years with each paycheck. Then the unthinkable happens. You have a medical emergency. You lose your job. Paying bills becomes harder and harder. You reach the point where bankruptcy is a welcome relief to your financial situation. But what happens to your retirement benefits?

Financial hardship can hit anyone at any time. The federal government recognizes this and has put rules in place to protect your retirement. When you declare bankruptcy, many retirement accounts qualify for exemption based on the Employee Retirement Income Security Act of 1974 (ERISA).

What is ERISA?

ERISA protects many retirement accounts and pension plans set up through an employer. It has guidelines for how the employee should create and maintain the accounts. Accounts that qualify for ERISA protection can include pensions, 401 (k) plans and profit-sharing plans, among others.

ERISA-qualified plans have an anti-alienation clause to protect your funds. This clause states that until you retire, the plan administrator holds your money. You technically have no legal claim to the money in the accounts until your retirement. This protects your accounts from creditors, since they can’t claim that the accounts are part of your assets.

What if I don’t have an ERISA-qualified plan?

ERISA doesn’t cover simplified employee pension plans (SEPs) or individual retirement accounts (IRAs). However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 does protect IRAs. If you set up your own IRA, or if your company pays into your IRA through a SEP, this act protects that IRA in a bankruptcy.

These two acts do not necessarily cover all retirement accounts. An attorney can help you understand whether the acts cover your benefits or not.

Financial hardship can happen. But declaring bankruptcy doesn’t mean you have to risk the funds you have for retirement.

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