Will I lose my retirement in bankruptcy?

​If you are looking to file bankruptcy and have a 401K, IRA, pension, or retirement plan you should be careful to make sure that asset is exempt before you file. Many retirement vehicles fall under the Employment Retirement Income Security Act of 1974 “ERISA” and are 100% exempt from creditors. That being said, never assume your retirement is exempt as the bankruptcy trustee will always require written proof. Usually this information can be found in your plan booklet which is a ~30 page document you must request from your plan administrator.

If your plan is an ERISA qualified plan it is technically not part of the bankruptcy estate under Section 541 of the bankruptcy code and, therefore, not subject to creditor claims as held in Patterson v. Shumate, 504 U.S. 753 (1992). Nevertheless, any asset should be disclosed and "exempted" on your bankruptcy petition. If your 401K, 403(b), annuity, profit sharing plan, pension, Roth IRA, IRA, or other defined benefit plan is not ERISA it may be still be exempt. Under North Carolina exemptions IRA’s are generally exempt up to one (1) million dollars.

For non-ERISA plans under North Carolina exemptions we first look to NCGS 1C 1601(a)(9):

Individual retirement plans as defined in the Internal Revenue Code and any plan treated in the same manner as an individual retirement plan under the Internal Revenue Code, including individual retirement accounts and Roth retirement accounts as described in section 408(a) and section 408A of the Internal Revenue Code, individual retirement annuities as described in section 408(b) of the Internal Revenue Code, and accounts established as part of a trust described in section 408(c) of the Internal Revenue Code. Any money or other assets or any interest in any such plan remains exempt after an individual's death if held by one or more subsequent beneficiaries by reason of a direct transfer or eligible rollover that is excluded from gross income under the Internal Revenue Code, including, but not limited to, a direct transfer or eligible rollover to an inherited individual retirement account as defined in section 408(d)(3) of the Internal Revenue Code.

The second place we usually look is 11 USC 522 (b)(3)(C) or 11 USC 522(d)(12) which exempts:

Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.

Often the tax treatment is difficult to determine and your Plan Administrator may be able to provide a determination letter. If you determine your retirement is exempt that does not mean your should immediately move all your cash into your retirement to “protect” that money as the trustee may challenge that transfer or object to your discharge as “bad faith” on your part. Please seek legal advice if you are concerned about your creditors and retirement as the laws vary by state.