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Can bankruptcy affect my pension?


In most cases, when a debtor files a Chapter 7 or Chapter 13 bankruptcy, they are allowed to keep their pension or retirement plans. However, there are a few limitations and exceptions that exist. In order to ensure your pension will not be affected by filing a Chapter 7 or Chapter 13 bankruptcy, a debtor should guarantee that their pension falls within one of two categories. The first category being that your pension is a plan that is automatically excluded. A debtor can determine if their pension is an excluded plan by contacting the plan administrator associated with their plan. The second category is that your pension plan falls within a state or federal exemption. A debtor must also be aware that some employment investment benefits don’t necessarily qualify for protections. One example of a plan that does not qualify for protections are stock option plans. Additionally, if a debtor receives income from a qualifying plan that income is not protected from bankruptcy. If a debtor holds a pension with a private company their pension is protected if they qualify under the Employment Retirement Income Security Act of 1974 (ERISA). 

Retirement plans and accounts that the debtor can keep automatically include educational Individual Retirement Accounts (IRA), subject to certain limitations; pension and retirement plans qualified under the Employee Retirement Income Security Act of 1974; government retirement plans; deferred compensation plans; and tax-deferred annuity plans. Because these accounts are not considered to be a part of the bankruptcy estate, they do not come under the control of the bankruptcy trustee. Due to these accounts not being under the control of the trustee a debtor does not technically need to claim the accounts as exempt, but some attorneys may still mark them as exempt. Even though they are exempt the debtor must still disclose their interest in the accounts on the bankruptcy schedules. 

If your pension or retirement plan does not fall under an automatic exemption, then there are other ways a debtor can protect the accounts. When a debtor files for bankruptcy they are allowed to keep a certain amount of property that is needed to work and live off. Depending on your state, the debtor will be eligible to claim either state or federal exemptions. Some of these exemptions allow a debtor to exempt other types of retirement accounts. If the type of pension account the debtor holds falls under this exemption then the debtor gets to keep it. Thankfully, under both state and federal exemptions most plans will qualify for some form of exemption. If a debtor claims state exemptions, they are still entitled to keep any pension or retirement plan that’s excluded from the bankruptcy estate automatically. If the debtor claims federal exemptions, they are entitled to claim an exemption for any right to receive payments under any pension to the extent necessary to the debtor’s support or support of the debtor’s dependents. However, there are limitations if the debtor is employed by a close family member and that employer created the plan. 

If a debtor is asked to prove to the bankruptcy trustee that they are entitled to claim the exemption to the extent it is necessary to the debtor’s support or support of the debtor’s dependents, the trustee may ask the debtor to prove that all expenses being paid are reasonable and necessary.  Reasonable and necessary expenses include housing, food, medical care, utilities, and transportation. If the debtor is using any portion of the pension to make unreasonable or unnecessary expenses, they may not be exempt. The trustee also has the right to examine the debtor’s pension contribution history. The trustee will do this to determine if the debtor contributed large amounts prior to filing a bankruptcy petition to determine if the contributions were placed in the pension account to avoid the hands of the bankruptcy trustee. If it is determined that the debtor placed excess funds in the pension the court can order the recovery of any excess amount. 

If a debtor is filing bankruptcy, they must be aware of non-exempt pensions. Non-exempt pensions include improperly funded plans; plans that the U.S. Tax Code does not recognize as qualified retirement plans; employee stock purchase plans; inherited IRA plans, unless the debtor inherited the plan from their spouse; plans that are compliant with the U.S. Tax Code, and plans funded by a rollover from a previous fund when the rollover did not comply with the U.S. Tax Code. 

Lastly, a debtor may also be wondering if they can continue to contribute to their pension plan after declaring bankruptcy. This is usually something that the debtor and trustee agree upon. The trustee may determine that the money you would like to contribute would be better suited for repaying a portion of your debts. The best option for a debtor is to consult with a knowledgeable bankruptcy attorney prior to filing to verify that they will not lose pension or to see what further options they may have.


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