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Will I Lose My Retirement If I File Bankruptcy?


No. If you file bankruptcy, you won’t lose pension plan benefits, nest egg savings accounts, like IRAs, or government Social Security benefits. All these things are protected assets in California, even if they resemble income benefits, which are normally not exempt. But the news isn’t all good. The law is unclear on some points. Furthermore, a large cash account is a tempting liquidation target for an aggressive trustee (person who manages a bankruptcy on behalf of the creditors). So, the trustee often looks for a loophole in the law.

A well-prepared bankruptcy lawyer usually does their homework regarding the debtor’s exemptions in order to protect the client from the  trustee’s attempt to raid a retirement account. Preparation is usually the key to success. Students who do well on their homework typically do well on test day, no matter how difficult the test is. Bankruptcy preparation includes researching the complex law and crafting an argument that resonates with a particular judge.

The Automatic Stay

Section 362 of the Bankruptcy Code applies to everything the debtor owns, whether or not it’s exempt.  In a Chapter 7 or Chapter 13, the Automatic Stay halts most creditor adverse actions, such as:

  • Wage garnishment;
  • Account levy;
  • Foreclosure;
  • Repossession; and
  • Utility shutoff.

So, in order to liquidate a retirement account or any other asset, the trustee must first convince the judge to bypass the Automatic Stay. Usually, the trustee couples this request with a motion for turnover, which directs the debtor to “turn over” account passwords and other account access information.

Nevertheless, the Automatic Stay is an extra protective layer that shields your retirement accounts. If a Costa Mesa bankruptcy lawyer thwarts the attempt to bypass the stay, the merits of the trustee’s arguments are irrelevant.

Public Retirement Benefits

Teacher retirement and Social Security Insurance payments are the most common public retirement benefits in bankruptcy cases. Other state agencies offer pension plans as well.

Frequently, teacher and other public employee retirement and pension accounts are quite lucrative. To deal with a 1990s budget crisis, California lawmakers reduced public employee pay in some cases and promised these workers generous retirement benefits, basically as deferred compensation.

The California exemption protects 100 percent of these benefits, regardless of the account’s size. However, there’s some question as to whether this exemption is personal. More on that below.

The way a debtor handles this money could be an issue as well. Most people deposit wage income, which is normally nonexempt, and exempt income, such as Social Security benefits, into the same account. That method is convenient, but it could create commingling issues.

These issues aren’t limited to the account itself. If Ben buys a car with commingled funds, that car might or might not be exempt.

To avoid such problems, it may be a good idea to separate exempt and nonexempt funds, and leave a paper trail as to what funds are connected to what asset. Tread very lightly in this area. Moving money could result in bankruptcy fraud charges.

Private Retirement Benefits

The law clearly protects earned IRAs and other nest egg accounts. The law is equally clear that inherited IRAs are nonexempt. This inconsistency, although logical, creates problems.

Many people have mixed inherited/earned accounts. It’s difficult to separate these two funds. Interest rates vary from year to year and often month to month. Furthermore, the account balance could go up or down, even if the debtor makes regular contributions.

Additionally, account ownership sometimes matters. If Ben’s wife files bankruptcy individually, Ben’s retirement benefits could be at risk.

Count on a Thorough Lawyer

Regardless of your financial problems, there’s usually a way out. For a free consultation with an experienced bankruptcy lawyer in Costa Mesa, contact The Law Office of Charles A. May.


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