Bankruptcy and Pensions: What’s Protected and What’s Not

When you file for bankruptcy, most retirement accounts survive, but the protection is not uniform. A 401(k), pension, or other ERISA-qualified employer plan is shielded in full, no matter the balance. A traditional or Roth IRA is protected up to $1,711,975 for cases filed between April 1, 2025 and April 1, 2028, with money rolled in from an employer plan protected above that cap. Inherited IRAs, non-qualified deferred compensation, and IRAs that have been tainted by a prohibited transaction get little or no protection at all. That is the short answer on bankruptcy and retirement accounts; the details below tell you where your own money sits on that spectrum.

401(k)s, Pensions, and Other ERISA Plans

Employer-sponsored plans governed by the Employee Retirement Income Security Act of 1974 receive the strongest bankruptcy protection available. This includes 401(k)s, 403(b)s, traditional defined benefit pensions, profit-sharing plans, money purchase plans, and stock bonus plans. ERISA requires these plans to include anti-alienation provisions that keep creditors away from a participant’s benefits.¹

Federal bankruptcy law honors that restriction. If a trust restricts the transfer of your beneficial interest and that restriction is enforceable outside of bankruptcy, it remains enforceable inside bankruptcy.² The Supreme Court confirmed the point in Patterson v. Shumate, holding that an interest in an ERISA-qualified plan is not property of the bankruptcy estate at all.³ The trustee has no authority over the account, no matter which exemption system you use or what state you live in.

There is no dollar limit on this protection. It covers your contributions, your employer’s match, and every dollar of investment growth. A Solo 401(k) or single-participant defined benefit plan maintained by a sole proprietor qualifies too, so long as the plan documents are properly maintained and the tax code’s qualification rules are met. A plan that has received a favorable IRS determination letter is presumed qualified; if yours hasn’t, you can still claim protection by showing substantial compliance with the tax code.⁴

Government Plans and 457(b) Plans

Government plans and church plans are exempt from ERISA, so they lack ERISA’s anti-alienation clause. They are still protected in bankruptcy, but through a different route: the federal exemption at 11 U.S.C. § 522(d)(12) covers retirement funds in accounts qualifying under Internal Revenue Code sections 401, 403, 414, and 457, among others.⁴ Governmental 457(b) plans maintained by state and local governments hold assets in trust for employees and are generally well protected in the participant’s bankruptcy.

Non-governmental 457(b) plans are a different case. If you work for a tax-exempt hospital, university, or similar organization and participate in its 457(b), plan assets must legally remain the property of the employer and stay available to the employer’s general creditors.⁵ Your own bankruptcy filing won’t expose those funds to your creditors, because the money isn’t legally yours to begin with, but you carry a separate risk that the employer’s insolvency could wipe the balance out.

Traditional and Roth IRAs

IRAs work differently from employer plans. When you file, your IRA enters the bankruptcy estate, and you claim an exemption to pull it back out. That exemption has a ceiling.

Under the federal exemption system, the cap is $1,711,975 in aggregate across all of your traditional and Roth IRAs. This figure applies to cases filed between April 1, 2025 and April 1, 2028, and it adjusts for inflation every three years.⁴ For most filers, that ceiling is well beyond their balance. For a saver who has spent decades building a large IRA, the portion above the cap is exposed in a Chapter 7.

Rollover Money Is Not Capped

The dollar cap applies to funds accumulated through regular annual contributions and their earnings. Money rolled over from an ERISA-qualified employer plan keeps unlimited protection even after landing in an IRA. The bankruptcy code explicitly states that direct transfers and eligible rollover distributions from a qualified plan do not lose their exempt status.⁴

Documentation matters here. If a single IRA holds both rollover dollars and regular contributions, you need records showing which is which. A separate rollover IRA that was never commingled with contributions is the cleanest proof. If the funds are mixed, expect to produce account statements and transfer records going back to the original rollover. Trustees and creditors do challenge murky records.

SEP and SIMPLE IRAs

SEP and SIMPLE IRAs sit in a middle position. They are established under different Internal Revenue Code sections than traditional IRAs (408(k) and 408(p) respectively), and because they involve employer contributions, they generally get broader protection. The federal exemption statute covers accounts qualifying under section 408 without distinguishing among IRA subtypes, but the dollar cap in section 522(n) references only IRAs under 408(a) and Roth IRAs under 408A. Many courts have read this to mean SEP and SIMPLE balances are not subject to the cap. If you hold a large SEP or SIMPLE, confirm the point with a bankruptcy attorney in your jurisdiction.

Inherited IRAs Are Not Protected

An IRA you inherited from a parent, sibling, or non-spouse relative does not carry the same protection as one you funded yourself. In Clark v. Rameker, the Supreme Court unanimously held that inherited IRAs are not “retirement funds” under the bankruptcy code and cannot be exempted from the estate.⁶

The Court’s reasoning was practical. An inherited IRA doesn’t function like retirement savings: you can’t add new contributions, you must take distributions regardless of your age, and you can withdraw the entire balance at any time without an early withdrawal penalty. Because it lacks the basic features of money set aside for retirement, it doesn’t qualify for the retirement fund exemption.

Surviving spouses have an option that other beneficiaries do not. A spouse can roll an inherited IRA into their own IRA, which then qualifies for normal protection. Everyone else takes the full balance into bankruptcy exposed to creditors. Some states offer separate protections for inherited IRAs under their own exemption systems, but federal law provides none.

How IRA Protection Can Be Lost

Even a self-funded IRA can lose its exempt status if the tax code’s rules were broken along the way.

Prohibited Transactions

The Internal Revenue Code lists transactions an IRA owner cannot engage in with their own account: borrowing from the IRA, using it as loan collateral, selling property to it, or buying property from it. Any prohibited transaction disqualifies the account as of the first day of that tax year. The entire balance is treated as if distributed to you on that date, triggering income taxes and potential early withdrawal penalties.⁷

For bankruptcy purposes, a disqualified IRA is no longer an IRA. It is a taxable account holding cash or investments, with no retirement exemption available. Owners of self-directed IRAs holding real estate or private businesses fall into this trap most often, because the line between permitted investment and prohibited self-dealing can be thin.

Contributions Right Before Filing

Contributions made to an IRA shortly before filing draw scrutiny. A trustee can challenge recent contributions as fraudulent transfers if the primary intent was to shield money from creditors rather than save for retirement. Regular, consistent contributions in the ordinary course are generally safe even close to a filing date. A sudden, large contribution right before filing raises a red flag. The trustee bears the burden of proving fraudulent intent, but the timing pattern often speaks for itself.

Non-Qualified Deferred Compensation

Non-qualified deferred compensation plans, executive stock option plans, and similar arrangements sit outside the framework that protects ERISA plans and IRAs. These plans do not meet the tax code’s qualification requirements by design, often because they cover only select executives and exceed the contribution limits that apply to qualified plans.

Their defining feature is that they must remain unfunded. Plan assets stay on the employer’s books and are available to the employer’s general creditors.⁸ ERISA’s anti-alienation shield does not apply. When you file, the trustee examines the plan documents; if you hold a vested, present right to payment, that interest becomes property of the estate. Any protection has to come from a general state exemption, and state exemptions for annuity or insurance values are rarely large enough to cover the balances typical in executive compensation.

Federal vs. State Exemptions

The federal exemption system is one option, and it is not available everywhere. Federal law lets states opt out of the federal exemptions and require residents to use the state’s own scheme instead.⁴ A majority of states have opted out.

Where a choice is available, comparing the two systems is essential. The federal system caps IRA protection at $1,711,975. Many states offer unlimited IRA exemptions, which is more generous for anyone with a large balance. But the choice covers all your assets, not just retirement. A state with unlimited IRA protection but a weak homestead exemption may not be the better package if you also own a home with significant equity.

For ERISA-qualified plans, the choice does not matter. Those accounts are excluded from the estate either way. The system selection only affects assets that need an affirmative exemption: IRAs, annuities, non-qualified plans, and other property.

The Domicile Rule for Recent Movers

Which state’s exemptions apply depends on where you have been living. If you lived in the same state for the entire 730 days (roughly two years) before filing, that state’s exemptions govern. If you moved during that window, the applicable exemptions come from the state where you lived for the greater part of the 180-day window immediately preceding the 730-day lookback. In practice, that means looking back about 910 days before your filing date to determine your domicile during that earlier six-month stretch.⁴ Congress wrote the rule to discourage last-minute moves to friendlier states. If you have relocated recently, the applicable exemptions may come from a state you no longer live in.

Chapter 7 vs. Chapter 13

The chapter you file under changes what happens to any retirement value that is not fully protected.

In Chapter 7, the analysis is binary. If an asset is excluded (an ERISA plan) or fully exempt (an IRA within the dollar cap), the trustee cannot touch it. If it is not protected, whether that is the portion of an IRA above $1,711,975, a non-qualified plan, or an inherited IRA, the trustee seizes and liquidates the non-exempt value and distributes the proceeds to unsecured creditors.

Chapter 13 does not involve immediate liquidation. You propose a three-to-five-year repayment plan. Excluded and exempt retirement assets are left alone. Non-exempt retirement value still creates an obligation through the “best interests of creditors” test: unsecured creditors must receive at least as much through your Chapter 13 plan as they would have received in a Chapter 7 liquidation. If you hold non-exempt retirement funds, you will pay creditors an equivalent amount from future income over the life of the plan.

Chapter 13 does offer one useful feature for retirement savers. Your regular, ongoing contributions to a qualifying retirement plan, meaning amounts withheld from wages for ERISA plans, governmental 457 plans, or 403(b) plans, are excluded from the “disposable income” calculation that sets your monthly plan payments.² You can keep contributing during the repayment period without those dollars going to creditors.

401(k) Loans During Bankruptcy

A loan from your own 401(k) creates an unusual situation. The loan is not a debt to an outside creditor; it is money you owe back to your own account. Because of that, it is not dischargeable. Filing does not erase the obligation to repay yourself.

In Chapter 7, you can keep making loan repayments voluntarily, but the loan balance cannot be used to reduce your assets for means test purposes. If you stop repaying, the outstanding balance is treated as a distribution from the plan, triggering income tax on the unpaid amount and, if you are under 59½, an additional 10% early withdrawal penalty.

In Chapter 13, the bankruptcy code specifically provides that payroll-deducted loan repayments to qualifying retirement plans are not blocked by the automatic stay that otherwise halts debt collection.² The repayment mechanism keeps running normally, preventing the loan from converting into a taxable distribution during the case. The tradeoff is that those repayment dollars reduce your take-home pay, which can make it harder to fund the Chapter 13 plan itself.

The worst outcome is defaulting on a 401(k) loan around the time you file. You face income taxes and possible penalties on the deemed distribution, and unlike most debts, the tax liability from a retirement plan distribution is not dischargeable in bankruptcy.

1
U.S. Department of Labor. Retirement Plans and ERISA FAQs
2
Office of the Law Revision Counsel. 11 USC 541 – Property of the Estate
3
Legal Information Institute. Patterson v Shumate, 504 US 753 (1992)
4
Office of the Law Revision Counsel. 11 USC 522 – Exemptions
5
Internal Revenue Service. Non-Governmental 457(b) Deferred Compensation Plans
6
Justia US Supreme Court. Clark v Rameker, 573 US 122 (2014)
7
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
8
U.S. Department of Labor. ERISA Advisory Council Report – Examining Top Hat Plan Participation and Reporting