When filing for a Chapter 7 or Chapter 13 bankruptcy, you may be wondering if you will be able to keep your pension/retirement benefits. To guarantee that your pension or retirement account is exempt, you must verify that it falls under two categories. The first is that the plan is automatically exempt and second, you can protect the account with state or federal exemptions. However, Colorado has opted out of the Federal exemptions, so in most cases the debtor gets to keep their tax-exempt retirement accounts. Tax-exempt retirement accounts include 401ks, IRAs, Roth IRAs, ERISA defined pension plans, veterans of armed conflicts pensions, and various public employee pensions, and they are all exempt from assets that can be taken in a bankruptcy. However, there is a dollar limit for certain types of retirement accounts, but it is high enough that it is unlikely to affect your bankruptcy in Colorado.
For your retirement account to obtain these protections, it must be a true retirement account. Therefore, it cannot be a bank account simply labeled “retirement”, or other similar wording. The issue with contributing to a bank account simply labeled as a retirement account is that it is not a recognized retirement account, and it will be absorbed in the bankruptcy estate. A true retirement account (not a bank account labeled retirement) can be called many different terms, like pensions, 403b, thrift plans, 401ks, IRAs, Roth IRAs, ERISA defined pension plans and veterans of armed conflicts pensions. Additionally, various public employee pensions are fully protected. Qualifying accounts do not include savings accounts, investment accounts, and stock option plans.
There are instances where your retirement account is disqualified in whole or in part from the protections awarded by the state. If someone has contributed large amounts to a retirement account or pension in anticipation of bankruptcy, those payments can be reversed and added back into the assets that can be utilized to pay back creditors. Thankfully, the contributions you made prior to the contribution made in preparation of bankruptcy will remain untouched by the bankruptcy.
You may be in possession of an exempt retirement account or pension, but there are instances where it may be absorbed in the bankruptcy estate as income. Under a Chapter 7 bankruptcy, the Court will consider monthly payments from your benefits as income. This income will be included in the means test and may affect your qualification for a Chapter 7 bankruptcy. However, there are limits to the amount the Court can touch. The Court cannot take any retirement benefits you need to support yourself, but it can take any excess of funds and repay your creditors with this money. When filing a Chapter 13 bankruptcy any income from your retirement accounts will be taken into consideration in your plan payment.
What about taking a retirement loan after filing for bankruptcy?
After filing a Chapter 7 bankruptcy, you are free to take a loan against your retirement account since it was acquired after the filing of your bankruptcy. Nevertheless, you should wait until after the Court officially discharges your debt as there may be unforeseen events. However, if you filed a Chapter 13 bankruptcy, you will need to obtain permission from the Court to take out a loan against a retirement account while you are actively paying back your creditors as this is considered a new expense.