Attorney at Law
Will I Lose My Retirement Accounts in Bankruptcy?
Most of the time there is no realistic possibility that you could lose even part of your retirement accounts, pension or other retirement benefits as part of bankruptcy, and thank God for it. The purpose of bankruptcy is to get you back on your feet, not to knock you off of them. Thus, the Ohio bankruptcy exemptions, which are laws I use in your bankruptcy petition to protect your property, allow for almost 100% protection of any retirement asset.
As always in the law there are exceptions, but they are rare. Probably the most common exception is if the value of our retirement is excessive, meaning that you have so much money in your retirement that it goes beyond the amount that is reasonably necessary to support you from the point of retirement to the end of your life. For instance, if you’re 65 and have got $2 million in an IRA, I could see the bankruptcy trustee making the argument that you don’t need that money to have a comfortable retirement and that instead the court should force you to cash out some of that IRA to pay towards your creditors. However, I’ve never actually had a client come into my office with that kind of money in an IRA. If they had that kind of money they probably wouldn't be looking into bankruptcy in the first place.
A second reason why your retirement might be seized would be if it was not a proper ERISA-qualified retirement account. What this means essentially is that the institution that is holding your retirement funds did not follow the rules and didn’t actually set you up with a retirement account, just something they told you was a retirement account. Again, I’ve never actually seen this happen. Almost any institution that is handling funds intended for retirement is going to have an army of competent lawyers working for it who spent hours and hours and hours making sure all the rules are followed to a “T.” Statistically speaking, there is almost no way this is going to be a concern.
The final possibility, and the one that I actually have seen occur, is when you “overstuff” your IRA with more money than you are allowed to put into it. You are only allowed to put $5,000 into an ordinary IRA per year, and any additional funds you put into the IRA do not qualify as retirement funds but are considered to be the same as money that you have in an ordinary bank account. For instance, if you had $500,000 in the bank you cannot just stuff it into an IRA and declare bankruptcy without having to worry about losing that money when you go to court. The reason for this rule is to prevent people from abusing the bankruptcy system by mischaracterizing money as retirement funds when in actuality it is just plain old cash money that they jammed into an IRA at the last minute.