• Are You Able To Keep Your Retirement Accounts in Bankruptcy?
  • June 19, 2012
  • Law Firm: Law Offices of Rami N. Nabi - Tustin Office
  • Are you able to keep your retirement when you file for bankruptcy? The answer is typically yes. However there are some considerations that will need to be looked at before you file.

    1. Payments Under Stock Bonus, Pension or Profit Sharing Plan etc:

    A debtor may exempt his or her right to receive payment under a stock bonus, pension , profit sharing, annuity or similar plan or contract on account of illness, disability, death, age or length of service to the extent that it is reasonably necessary for the support of the debtor and any dependent, unless all of the following apply:

    - The plan or contract was established by (or under the auspices of) an “insider employed by the debtor at the time the debtor’s right under the plan or contract arose;

    - The payment is on account of age or length of service and

    - The plan or contract does not qualify as a pension plan, profit sharing plan, stock bonus plan, IRA or Roth IRA under the Internal Revenue Code

    The courts have stated that the limitation for the retirement account has to be ” reasonably necessary for the debtor’s support: So if the plan qualifies for exemption in the first place, the court must still examine the debtor’s income and exempt property and liabilities to determine if the amount is “reasonably necessary” for the support to the  debtor and debtor’s dependents. In re Metz (9th Cir. BAP 1998) 225 BR 173,179-plan intended solely for debtor’s retirement qualified for exemption (plan not established to shield assets or satisfy immediate cash needs.

    The bankruptcy code limits the exemption amount for IRA to $1,171,650 Bu the cap may be increased “if the interests of justice so require” 11 USC 522(n)

    2. 401k accounts, employee annuities,IRA accounts, Deferred Compensation plans, qualified pension, profit sharing and bonus plans

    California debtors also have the option of exempting certain retirement funds under the Bankruptcy Code and if the funds are in a retirement account that has received a favorable IRS determination they are presumed exempt. Below are a list of exempt retirement accounts for California Debtors:

    - 401(k) accounts

    - Employee Annuities

    - IRA accounts

    - Employee defined benefit/contribution

    - State and Local Government deferred compensation or

    - Qualified pension, profit-sharing and stock bonus plan

    The exemption also includes certain rollover funds and transfers.

    3. Favorable and not favorable IRS determination

    The key to the exemptions is whether the funds has received a favorable IRS determination under 26 USC 7805 and the determination is in effect as of the time the bankruptcy petition date. If the funds are deemed favorable there shall be presumed exempt for the estate. If the retirement funds are in a retirement fund that has not received a favorable IRS determination, the funds are exempt if the debtor demonstrates:

    1. no prior determination to the contrary has been made by the court or IRS and

    2. the retirement fund is in substantial compliance with the applicable requirement of the Internal Revenue Code or

    the retirement funds is not in substantial compliance with the Internal Revenue Code and the “debtor” in not materially responsible for the noncompliance.


    It is important to speak to an attorney about your retirement funds. Although most of the time they will be protected there are instances in which they may be not. Contact the Law Office of Rami N. Nabi at 714 202 6529 to find out more info about your bankruptcy and your retirement accounts.